Problem
Daily demand for a popular LG OLED TV at Best Buy distribution center is normally distributed with a mean of 492 units per day and a standard deviation of 68 units per day. Best Buy orders the TVs directly from the LG manufacturing facility in South Korea. Best Buy would live to maintain a 99% cycle service level for its televisions. The holding cost is 41% of the purchase cost per unit per year.
Best Buy is considering whether to use sea or air transportation from South Korea or to partner with LG's new facility in Mexico and ship by truckload.
- If using sea transportation from South Korea, Best Buy will review its inventory continuously.
The lead time for an order is normally distributed with mean 46 days and standard deviation 3 days.
The purchase cost per unit is $837.
- If using air transportation from South Korea, Best Buy will review its inventory continuously.
The lead time for an order is constant at 6 days.
The purchase cost per unit is $842.
- If using ground transportation from Mexico, Best Buy will review its inventory every 29 days.
The lead time for an order is constant at 7 days.
The cost per unit will is $839 per unit.
• Compute the annual holding cost of the safety stock in dollars needed to maintain the desired cycle service level if using sea transportation from South Korea.
• Compute the reorder point needed to maintain the desired cycle service level if using sea transportation from South Korea.
• Compute the safety stock needed to maintain the desired cycle service level if using air transportation from South Korea.