Reference no: EM132303687

Weekly demand for electric motors at a Japanese motor manufacturer is normally distributed with a mean of 1,000 and a standard deviation of 1,000. Motors are currently assembled in China and delivered at a cost of 20,000 yen per motor. (That is, each motor costs the Japanese manufacturer 20,000 yen each). The Chinese supplier takes 8 weeks to supply an order. A local Japanese manufacturer has offered to deliver motors with a lead time of 2 weeks at a cost of 20,400 yen per motor. The motor manufacturer is targeting a cycle service level of 99% and monitors its inventory continuously using a reorder point model. The manufacturer incurs a holding cost of 25% annually.

1. How many units must the safety stock be if the manufacturer uses the Chinese supplier?

2. How many units must the safety stock be if the manufacturer uses the local (Japanese) supplier?

3. Should the motor manufacturer accept the local supplier’s offer? You must justify your decision by showing the difference in the costs of the two options. The costs will include the holding cost for the safety stock and the purchase cost for the motors. Compute the annual total cost for the Chinese supplier and the annual total cost for the Japanese supplier. The manufacturer will choose the option with the lower total cost.

4. Does your choice of supplier change if the local Japanese supplier can supply motors with a 1 week lead time? Support your answer with the appropriate calculations.