Reference no: EM132859164

Question - Consider a consumer packaged goods (CPG) manufacturer that sells a product that is made in China and then transported to Los Angeles via ship. Each week the manufacturer in China makes enough goods to fill up half a container. The rate to ship a half a container from China to Los Angeles is $1,750, while the rate when they can ship a whole container is $3,000.

These goods are shipped to a warehouse in Los Angeles that expects to serve daily demand that follows a normal distribution with mean 1,500 and standard deviation of 100. It costs them $.02 to hold one good for one day at this warehouse and the CPG wants to maintain a 98% service level at this warehouse.

They currently ship a half a container a week from China, which leads to an average lead time of 7 days and a standard deviation of lead time of 2 days. They are considering holding one week's worth of goods in China so that they can ship a full container every other week. In that case, the average lead time is 14 days and the standard deviation of lead time is 4 days.

Required - What is their holding cost over two weeks if they ship from China every week?