Background You have just been hired as the transportation planner for XYZ Inc., a medium-sized importer of a wide array of consumer goods. Products imported by your company include everything from low-tech commodity goods to faster-moving electronics and trend items. The CEO wants a basic framework for making choices on how to import various types of items from China to the United States. The two options available are air freight and ocean shipping in 20 -foot containers. Air freight is, of course, faster and more reliable, however, ocean shipping is cheaper. You decide to evaluate the shipping decision based on two different categories - fast moving, high-cost items and slower-moving, lower-cost items. The specific categories chosen for evaluation are consumer electronics such as smart watches, and decorative hardware such as door handles. Current Situation XYZ provides most of its items to customers from a warehouse near Los Angeles, California. In this high-cost area, inventory holding costs average 25 percent per year on the value of all inventory held. The warehouse costs will remain constant regardless of which transportation mode is selected, so they can be left out of the analysis for now. The target cycle service level for all products is 98 percent. Since the company prides itself on importing a high-quality product, the high service level is required to please the customers. Transportation Options Air freight and ocean shipping are the two shipping options available to you to move product from China to the United States. Air freight charges are $10 per kg shipped and require a minimum shipment of 50kg. Air freight is extremely fast as well as reliable. The average lead time on air freight is one week with a standard deviation of 0.2 weeks. Ocean shipping is much cheaper. The cost for ocean shipping is $1,200 per 20 -foot container. Each container holds up to 15,000kg, so the shipping charge per kg is over 100 times less than air freight. However, ocean shipping takes longer and is less reliable. The average lead time using ocean shipping is nine weeks with a standard deviation of three weeks. Keep in mind, that inventory transfers ownership as soon as the shipping process begins, so your inventory holding cost includes cycle inventory, safety stock, and in-transit inventory. The Products You are planning shipping for Smart Watches and decorative hardware items. Weekly demand for the smart watches is 1,000 and has a standard deviation of 400 . Each smart watch costs $300 and weighs 0.1kg. The typical product life cycle for smart watches is about one year, so it is critical not to lose demand early in the life cycle because of lack of product availability. For the decorative hardware, weekly demand averages 5,000 with a standard deviation of 1,000. Each unit of the hardware costs $20 and weighs 1kg. Decorative hardware has a longer life cycle - for example XYZ is still selling door handles that were introduced ten years ago. Assumptions and Hints - Start with the XYZ Case Template spreadsheet - Use the EOQ to find order size for each product, for each mode. - Use the cost of a minimum shipment for ordering cost for each mode. - Inventory holding cost is based on total inventory which is the sum of: Cycle inventory, Safety inventory, and Transit inventory. - Since you are calculating shipping cost, and ordering cost is equal to minimum shipping cost for each mode, you do not need to include annual ordering cost as a separate cost category. So, the total cost without material is the sum of shipping and holding cost. - To find z, the safety factor, use NORM.S.INV('CSL'), where CSL refers to the given cycle service level. Safety factor is 'how many standard deviations' of safety inventory you'll have. So, safety stock is zgb Case Questions 1. What is the annual cost of using air freight and ocean freight to import smart watches? 2. What is the annual cost of using air freight and ocean freight to import decorative hardware? 3. Besides cost, what other factors should be considered in the choice of transportation mode? What mode would you recommend for each product? 4. Suggest a general framework to be used across all product categories. Search