Question

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.

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

Answer 1

To determine which supplier to choose, the Japanese motor manufacturer must calculate safety stock levels based on the lead times from both suppliers and compare the total annual costs, including holding and purchase costs. The local supplier's lead time significantly impacts the safety stock required and consequently the overall costs, which could make the local offer more attractive if the lead time is reduced.

Step-by-step explanation:

The Japanese motor manufacturer needs to calculate safety stock based on the lead times from both the Chinese and local suppliers to meet a cycle service level of 99%. Safety stock can be determined using the z-score that corresponds to the service level and the standard deviation of demand during the lead time. For the Chinese supplier with an 8-week lead time, the weekly demand standard deviation is 1,000, so the standard deviation for 8 weeks is the weekly standard deviation times the square root of 8 (STD for 8 weeks = 1,000 * sqrt(8)). For the Japanese supplier with a 2-week lead time, the standard deviation would be 1,000 * sqrt(2).

Once safety stock levels are calculated, the manufacturer will need to assess the total annual cost for each option, which includes the holding cost for safety stock and the purchase cost for the motors. Holding cost is based on the safety stock level and the annual holding cost percentage, while the purchase cost will depend on the unit cost from each supplier. Finally, these costs are compared to determine the most cost-effective option.

If the Japanese supplier can reduce the lead time to 1 week, the safety stock needed would decrease further, potentially altering the total annual cost comparison. A recalculation would be necessary to see if this would make the local supplier more attractive.