Question

tory turnover or S Should th . Suppose that e item be cross filled or served only out of the assgiled a company has two of its warehouses that it would like to consolidate tral warehouse. Three top-selling items stocked in both warehouses are for evaluation. From the monthly forecasts of ritories, the following statistics are known: e that selected the demand in th e two ware- Policy Decisions 401 WAREHOUSE 2 Monthly Standard Deviation WAREHOUSE Product Monthly Standard Deviation, Monthly value Monthly Demand, Demand Units $/Unit 15 30 25 Units Units Units 5,000 9,500 15,000 700 335 2,500 Units 500 250 Product 3,000 8,000 12,500 3,500 The product order quantities are determined locally a using the EOQ formula and are ordered from separate vendors processing cost of $25 per order. Replenishment lead times a or 0.75 months. Inventory carrying costs are 24 percent per year. The r during the order cycle is set at 95 percent. with an order weeks he service level How much inventory can be saved through risk pooling if the invento consolidated into a central facility?

Answer 1

Total cost computation of decentralized scenario

Product	Ordering cost, K	Product value, C	i	z	Lead time, L
A	$25	$15	24%	1.645	0.750
B	$25	$30	24%	1.645	0.750
C	$25	$25	24%	1.645	0.750
Product	d1	s1	EOQ, Q1= [2*12*d1*K / i.C]1/2	Safety stock, SS1 = z.s1.√L	Annual ordering cost (12d1/Q1)*K	Annual carrying cost (Q1 / 2 + SS1)*i.C	Total relevant cost
A	3,000	500	707	712	$1,272.98	$3,835.80	$5,108.78
B	8,000	250	816	356	$2,941.18	$5,500.80	$8,441.98
C	12,500	3,500	1118	4986	$3,354.20	$33,270.00	$36,624.20
Product	d2	s2	EOQ, Q2= [2*12*d2*K / i.C]1/2	Safety stock, SS2 = z.s2.√L	Annual ordering cost (12d2/Q2)*K	Annual carrying cost (Q2 / 2 + SS2)*i.C	Total relevant cost
A	5,000	700	913	997	$1,642.94	$5,232.60	$6,875.54
B	9,500	335	890	477	$3,202.25	$6,638.40	$9,840.65
C	15,000	2,500	1225	3561	$3,673.47	$25,041.00	$28,714.47
						Total cost	$95,605.62

Total cost computation of centralized scenario

Product	Ordering cost, K	Product value, C	i	z	Lead time, L
A	$25	$15	24%	1.645	0.750
B	$25	$30	24%	1.645	0.750
C	$25	$25	24%	1.645	0.750
Product	dC = d1 + d2	sC= √(s12+ s12)	EOQ, QC= [2*12*dC*K / i.C]1/2	Safety stock, SSC = z.sC.√L	Annual ordering cost (12dC/QC)*K	Annual carrying cost (QC / 2 + SSC)*i.C	Total relevant cost
A	8,000	860.2	1155	1225	$2,077.92	$6,489.00	$8,566.92
B	17,500	418.0	1208	595	$4,346.03	$8,632.80	$12,978.83
C	27,500	4,301.2	1658	6127	$4,975.87	$41,736.00	$46,711.87
						Total cost	$68,257.62

So, cost savings due to centralization = $95,605.62 - $68,257.62 = $27,348 per annum