Motorola obtains cell phones from its contract manufacturer located in China to

Question

Motorola obtains cell phones from its contract manufacturer located in China to supply the U.S. market, which is served from a warehouse located in Memphis, Tennessee. Daily demand at the Memphis warehouse is normally distributed, with a mean of 5,000 and a standard deviation of 4,000. The warehouse aims for a Type I CSL of 99 percent. The company is debating whether to use sea or air transportation from China. Sea transportation results in a lead time of 36 days and costs $0.50 per phone. Air transportation results in a lead time of 4 days and costs $1.50 per phone. Each phone costs $100, and Motorola uses a holding cost of 20 percent. Assume that Motorola takes ownership of the inventory on delivery.

Explanation / Answer

The company should use the air transportation, as it will reduce the lead time, I t is beneficial for the company as well as customers.

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