Question

Motorola obtains its smartphones and wall chargers from its contract manufacturer located in China to supply the U.S. market, which is served from a warehouse located in Memphis, Tennessee. Demand for both items at the Memphis warehouse is normally distributed. Daily mean and standard deviation of demand for smartphones is 5,000 and 2,000, whereas those for the wall chargers is 12,000 and 1,500, respectively. Each smartphone costs $400 and weighs 250 gr; each wall charger costs $25 and weighs 50 gr. Annual holding cost for the smartphones is calculated at 35%, while it is 20% for the wall chargers. The target CSL at the warehouse is 96 percent.

The company is debating whether to use ocean shipping or air freight from China. Including time to clear customs, ocean shipping results in an average lead time of 64 days with a standard deviation of 12 days, and costs $4,000 per container. Each shipping container has a capacity of 10,000 kgs. Air freight results in an average lead time of 24 days with a standard deviation of 8 days (including time in customs), and costs $1000 per shipment plus $15.00 per 1kg of freight weight.

Assume that Motorola takes ownership of the inventory as soon as it leaves the manufacturer in China. Hint: This means you have to consider the in-transit inventory.

a) Considering inventory holding and transportation costs, what is the annual cost of using air freight to import smartphones? What is the annual cost of using ocean shipping to import smartphones? Which transportation mode should they use for the smartphones?

b) Considering inventory holding and transportation costs, what is the annual cost of using air freight to import wall chargers? What is the annual cost of using ocean shipping to import wall chargers? Which transportation mode should they use for the wall chargers?

Answer 1

ANSWER:

Let us assume that smartphones and wall chargers are shipped separately.

Let is first calculate the cost of transit for Smartphones

Let us first write the given data in tabular form

Smartphones
average demand	5000
Std dev	2000
approx range	3000	7000
	low end	high end
per unit
weight (gr)	250
cost ($)	400
holding cost@35%	5000*400*0.35
avg. holding cost ($)	700000

Now let us mention the transport charges

The ocean shipping costs are as follows:

Ocean shipping
Avg lead time (days)	64
Std dev	12
approx range	52	76
	low end	high end
Cost per container($)	4000
capacity per container(Kg)	10000

Finally the ocean transport cost are as follows:

Ocean transit	low end	avg	high end
Required inventory	3000	5000	7000
weight(kg)	750	1250	1750
for 52 days lead time	39000	65000	91000
container required	4	7	10
Cost	16000	28000	40000
no. of units	156000	260000	364000
inventory holding cost	21840000	36400000	50960000
Final cost	21856000	36428000	51000000
for 76 days lead time	57000	95000	133000
container required	6	10	14
Cost	24000	40000	56000
no. of units	228000	380000	532000
inventory holding cost	31920000	53200000	74480000
Final cost	32148000	53580000	75012000

Hence, the ocean transport cost can range anywhere between - $2,18,56,000 to $7,50,12,000

The same can be calculated for Air transport

Air transit	low end	avg	high end
Required inventory	3000	5000	7000
weight(kg)	750	1250	1750
for 16 days lead time	12000	20000	28000
Cost	181000	301000	421000
no. of units	48000	80000	112000
inventory holding cost	6720000	11200000	15680000
Final cost	6901000	11501000	16101000
for 38 days lead time	28500	47500	66500
Cost	428500	713500	998500
no. of units	114000	190000	266000
inventory holding cost	15960000	26600000	37240000
Final cost	16388500	27313500	38238500

Hence the Air freight cost is between - $69,01,000 to $3,82,38,500

We can clearly see that air transport is very much cheaper and air transport is to be used

According to Cheg policy answering only the initial subparts.

If you follow the same strategy then you will find that even for wall charger, air transport is cheaper.