The two main products for a home-accessories retailer are rug and cookware. The weekly demand for rugs is normally distributed with a mean of 1200 and a standard deviation of 700. The weekly demand for cookware is normally distributed with a mean of 2500 and a standard deviation of 850. Each rug costs on average $250 and weighs about 1.5 kg. Each cookware costs on average $65 and weighs about 0.75kg. The retailer uses a continuous review policy and the annual holding cost for this retailer for both product types is 25 percent and the retailer’s target cycle service level is 97 percent. The retailer has two transportation options for receiving its orders from its contract suppliers: One option is to use water transportation mode that has a capacity of 2,000 kg per shipment and costs $900 per shipment load. The water transportation option results in a lead time of 7.5 weeks. Another option is to use air transportation mode that has a capacity of 700 kg per shipment and costs $3000 per shipment load. The air transportation mode is very fast and results in a lead time of 1 week. Which transportation option do you recommend for this retailer for each product? Assume under both transportation options, the retailer takes ownership of the inventory in transit. Please show all your analysis.
