A company distributing shampoo bottles to retail stores currently operates two warehouses. Each warehouse estimates that weekly demand has a Normal distribution with mean 200 and standard deviation 30. (Demands are independent.) Each warehouse is 1 week away from the factory. At each warehouse location, the holding cost is $0.50 per unit per week and the backorder cost is $2.50 per unit per week. The company is considering consolidating the two warehouses into a single ‘consolidated’ warehouse. Suppose that the lead time from the factory to the consolidated warehouse continues to be of 1 week. (Note 1: Recall that, when demands are independent and with the same standard deviation ?, the standard deviation of aggregate demand is equal to ?Ö2. Note 2: Cost refers to the “expected cost per unit time” in the spreadsheet.)
What are the cost savings associated with operating the consolidated warehouse?
Cost of consolidated warehouse ________
Cost savings ________________
If the standard deviation in each location is 35, what are the cost savings then?
Cost of consolidated warehouse ________
Cost savings ________________
What if the standard deviation in each location is 40?
Cost of consolidated warehouse ________
Cost savings ________________
How does demand variability impact the value of consolidating warehouses (in terms of cost savings)? Explain your answer.
