A regional automotive dealership has 3 showrooms in 3 locations from which it sells an affordable, highly standardized hydrogen-powered passenger vehicle. Demands at these locations are normally distributed (the relevant parameters are shown in the table below) and are uncorrelated. Currently, each retail location carries its own cycle and safety stocks, serving its customer base independently, with a company- wide 98% cycle service level policy. Company policy also dictates that no customer demand go unsatisfied and, in order to avoid lost sales, every order backlog is satisfied within 10 days via a special order to the manufacturer, at a cost of $1,500/car. Each dealer location independently uses a periodic review inventory control system with a review period of 30 days. The dealership locations are open 365 days a year. The normal delivery lead time from the manufacturer of these cars is 12 days. It costs $2,000/year to hold an automobile in inventory at the three dealership car lots. The dealership management is considering implementing an inter-location, lateral transshipment policy, under which a demand shortfall at any location will be satisfied through a same day delivery from either of the other two locations (if the product is available). The cost of such a lateral local shipment is expected to be $200 per car. Can this proposed policy be economically justified? What are the expected annual cost savings, if any, resulting from this policy? If this lateral transshipment policy is adopted, is it advisable, from a cost standpoint, to reduce the cycle service to 95%, across the dealership? Annual Demand (units) Location Mean Std. Deviation 2,000 500 5,000 1,000 3,000 900 A regional automotive dealership has 3 showrooms in 3 locations from which it sells an affordable, highly standardized hydrogen-powered passenger vehicle. Demands at these locations are normally distributed (the relevant parameters are shown in the table below) and are uncorrelated. Currently, each retail location carries its own cycle and safety stocks, serving its customer base independently, with a company- wide 98% cycle service level policy. Company policy also dictates that no customer demand go unsatisfied and, in order to avoid lost sales, every order backlog is satisfied within 10 days via a special order to the manufacturer, at a cost of $1,500/car. Each dealer location independently uses a periodic review inventory control system with a review period of 30 days. The dealership locations are open 365 days a year. The normal delivery lead time from the manufacturer of these cars is 12 days. It costs $2,000/year to hold an automobile in inventory at the three dealership car lots. The dealership management is considering implementing an inter-location, lateral transshipment policy, under which a demand shortfall at any location will be satisfied through a same day delivery from either of the other two locations (if the product is available). The cost of such a lateral local shipment is expected to be $200 per car. Can this proposed policy be economically justified? What are the expected annual cost savings, if any, resulting from this policy? If this lateral transshipment policy is adopted, is it advisable, from a cost standpoint, to reduce the cycle service to 95%, across the dealership? Annual Demand (units) Location Mean Std. Deviation 2,000 500 5,000 1,000 3,000 900
