A specialized watch shop in an European Airport sells on average 30 units per week (or 30x52=1560 per year) with a standard deviation of 20 units per week. The cost price of a watch is SFr. 4000, and the yearly holding cost is 25% of the cost price. Replenishment from the distribution center to the shop costs 10 SFr. per delivery and takes 2 weeks. The shop owner maintains a service level of 90%.

The shop currently holds 3 weeks of inventory. In a quest to free up cash, the shop owner wants to optimize inventories.

[a] Determine the optimal (average) inventory level, consisting of cycle stocks and safety stocks.

The optimal average inventory level equals ___units, which is equivalent to __weeks of inventory. (Show calculations and breakdown if any)

[b] If the shop owner would adopt this optimal target inventory level instead of his current inventory levels, what would be the impact on ordering costs, and how much cash could be freed up?

Yearly ordering costs will be __________ Sfr. (Show calculations and breakdown if any)

Adopting the optimal inventory policy will free up (i.e., will reduce the working capital requirement with) __________ Sfr. (Show calculations and break down if any)