Assuming a service level of 99% for all parts, what will be the impact on the total inventory investment if the number of warehouses is reduced from 8 warehouses to 2? Reduced to 1? Assume that each of the 8 warehouse has roughly equal demand and, when consolidating the warehouses, the total demand across all 8 warehouses is equally divided between the remaining warehouses. A. Using data from the case, complete the table below. Note that Exhibit gives the standard deviation of the bi-weekly demand for 8, 2, and 1 warehouses respectively. Use these values to calculate the Stdev of weekly demand.
Product Griffin Beaker Erlenmeyer Flask
# of Warehouses 8 2 1 8 2 1
Z-Value 2.33 2.33 2.33 2.33 2.33 2.33
Calculations Average
for 1 warehouse Weekly
Demand
Stdev of
Weekly
Demand
POU (weeks)
Q
Average Pipeline
Inventory
Begin on hand
SS
Average On Hand
Average Inventory
Total Average Inventory
(all warehouses)
Calculate the percentage savings in total average Inventory investment from warehouse consolidation for each product. Assume lead time stays constant at 1 week:
from 8 warehouses to 2 warehouses.
from 8 warehouses to 1 warehouse.
Take a simple average of the percent savings for each part and apply the resulting average percent savings to the entire North American finished goods (NA FG) inventory. Assume 2010 NA FG is $5 million. Calculate the total savings for the NA FG if:
8 warehouses are consolidated to 2 warehouses.
8 warehouses are consolidated to 1 warehouse.
Would savings from consolidation compensate for the expected increase in inventory of $1.5 million if:
8 warehouses are consolidated to 2 warehouses?
8 warehouses are consolidated to 1 warehouse?
Griffin 500ml Beaker Erlenmeyer 500ml Flask
2009 units sold 11,268 3,389
Percent of all units sold 0.1% 0.03%
Annual carrying cost (%) 14% 14%
Unit price $8.80 $9.50
Unit cost $3.96 $4.56
Cost of underage $0.48 $0.49
Cost of overage $0.021 $0.025
Optimal service level 95.8% 95.3%
Average bi-weekly demand
(8 warehouses) 54.2 16.3
Standard deviation of bi-
weekly demand
(8 warehouses) 21.4 10.9
Average bi-weekly demand
(2 warehouses) 216.7 65.2
Standard deviation of bi-
weekly demand
(2 warehouses) 38.3 19.5
Average bi-weekly
demand (1 warehouse) 433.4 130.3
Standard deviation of bi-
weekly demand
(1 warehouse) 51.0 26.0