Consider a retailer selling basic mobile phones. The store sells on average around 1000 phones per month. The retailer gets her supply from a major regional distributor who charges $200 per phone. In addition, the distributor charges $5000 for every shipment he makes. The lead time between the distributor and the retailer averages at 2weeks. The customs charges the retailer 5% of the total value of the order. Assume 1 year = 48weeks and 1 month = 4 weeks. The retailer would like to grow her business and invest in a secondary business related to smart phones. These phones have a return as high as 25%/year. However, she is short on cash and the only way she could invest in this new business is by re-thinking carefully its inventory management strategy. Her main objective remains to maximize the profit from its primary (basic) phone business. Currently, the retailer is ordering three times a year and she is never out of stock.

1) a) What do you think the current quantity the retailer is ordering?

b) Do you agree with the quantity the retailer is ordering? And if so, explain why. If not, suggest a more profitable ordering quantity, Q*.

c) How many times your suggested-policy requires the retailer to order per year?

D By how much the policy you are suggesting is more profitable than the one currently in use?

In order to release more cash for its new business, the retailer is considering using another distributor. This second one is further away; the lead time remains at 2 weeks while the shipment cost is more expensive $6000. However, this second distributor offers a 10% discount on each of the $200 item ordered if the quantity ordered is above 5000units. The customs charges remain the same. What should the retailer do? Could she save more money with the second distributor? If yes, how much?

D) What is the retailers ROP whether she uses the first distributor or the second one?

E Suppose demand is not deterministic, but is volatile with standard deviation of 250units/month. What is the ROP if the retailer aims at achieving a 95% service level? (Z95%=1.64). What is the Safety stock (SS) that the retailer should hold in this case?