1. Due to acquisitions, a company has three warehouses supplying customers in the same geographic region. These warehouses currently all hold the same products and your manager understands that there is duplication as well as the idea of risk pooling so there might be an opportunity for consolidation. On the other hand, the distributed warehouses provide excellent service in terms of delivering to customers with short lead times.
a) As part of the analysis, the daily demands for a typical product (Product 1) over the past six months have been collected and provided in the spreadsheet. You are asked to determine the total safety stock reduction if the warehouses are consolidated assuming a service level of 98%.
[Note: Risk pooling only works as we discussed it if the demands are independent. Be sure to plot the demands from all three warehouses on a single graph and make sure that they are not correlated.)]
b) The potential consolidation discussion has now moved forward a bit and more data has been analyzed. There are actually two “types” of products relative to demand characteristics – one type is like Product 1 and another is like Product 2 that also has six months of demand data in the spreadsheet. Perform the same analysis as you did in problem 1 (i.e., plot the data and, if independent, compute safety stock for all three and then for the consolidated warehouse at a 98% service level).
c) You manager recalls something about a statistic called the coefficient of variation can lend insight into how effective consolidation can be. This reason she is interested it his is because one option on the table is to keep all three warehouses open but operate differently. In this new model, all warehouses would hold some of the same inventory if safety stock reduction isn’t “much” and shorter delivery times are a strategic advantage … and then have each warehouse hold all of other products for delivery to all customers. Compute the CV for Product1 and Product 2, and briefly discuss any relationship you see between CV and safety stock reduction. The briefly discuss if you think CV would be an effective measure to consider when deciding which products into those that should be held in all warehouses and those that should be consolidated.