1. Considertheperiodicreview,orderuptomodel.

Considertheairfreightoption

byexaminingthecostofinventoryforallmodelsinEurope,usinga98%servicelevelandthe

datagiveninTable1ofthecase.Iftheleadtimeis5weekswithseafreightand1weekbyair,

andifthereviewperiodis1weekbecauseofproductioncyclesatthefactory,whatsavingsin

averageinventoryareavailable?Assumethatthemarginalproductioncostisroughly$300and

thesellingpriceis$450.Perunittransportationcostis$10byseaand$25byair.Inventory

carryingcostsare24%peryear.

ThefollowingformulawereusedtoarriveattheSafetystockandAverageinventory:

Safetystock=k*l+r
Averageinventory=*R/2+Safetystock
Shipping
Options Monthlymean MonthlySD Leadtime ReviewPeriodServicelevel Z
(0.98) Sigma(L+R) Safetystock AverageInventory
A 42.3 32.4 1.25 0.25 0.98 2.05 39.6817338 81.3475544 86.635
AA 420.2 203.9 1.25 0.25 0.98 2.05 249.725479 511.937233 564.462
AB 15830.1 5624.6 1.25 0.25 0.98 2.05 6888.7 14121.835 16100.598
AQ 2301.2 1168.5 1.25 0.25 0.98 2.05 1431.11438 2933.78448 3221.434
AU 4208 2204.6 1.25 0.25 0.98 2.05 2700.07254 5535.14871 6061.149
AY 306.8 103.1 1.25 0.25 0.98 2.05 126.271196 258.855952 297.206
Total 26331.484

Air
Options Monthlymean MonthlySD Leadtime ReviewPeriodServicelevel Z
(0.98) Sigma(L+R) Safetystock AverageInventory
A 42.3 32.4 0.25 0.25 0.98 2.05 22.9102597 46.9660324 52.254
AA 420.2 203.9 0.25 0.25 0.98 2.05 144.179073 295.567099 348.092
AB 15830.1 5624.6 0.25 0.25 0.98 2.05 3977.1928 8153.24524
10132.008
AQ 2301.2 1168.5 0.25 0.25 0.98 2.05 826.254274 1693.82126 1981.471
AU 4208 2204.6 0.25 0.25 0.98 2.05 1558.88761 3195.7196 3721.720
AY 306.8 103.1 0.25 0.25 0.98 2.05 72.9027091 149.450554 187.801
Total 16423.345


Consolidated
Mode Cost/unit Carryingcost AverageInventory TotalInventorycosts Transport
Costs TotalCosts %savings(inventory)
Shipping 300 6 26331.484 157988.9037 0 157988.904
Air 300 6 16423.345 98540.06874 0 98540.0687 37.63%

Thustheinventorysavingsarereducedby38%inairfreightascomparedtoseafreight.
2. Usethesamemethodtoevaluatetheinventorysavingsassociatedwithageneric

EuropeanproductthatwouldbeassembledtoorderintheEuropeanDistributionCenter.What

aretheadvantages/disadvantagesofthisgenericprinteroption?

ThesameformulausedinQ1isused.Butheretheleadtimesaredifferent.

Assembly
Options Monthlymean MonthlySD Leadtime ReviewPeriodServicelevel Z
(0.98) Sigma(L+R) Safetystock AverageInventory
Total 23108.6 6244 1.25 0.25 0.98 2.05 7647.306977 15676.9793
18565.554

InthiscaseofassemblycarriedoutatEuropebothsavingsinAverageinventoryand

costsaresignificant.Hencethatisthebestoption(TransportbyshipandassembleinEurope).