A current warehouse system has five warehouses with 4,000 units at each warehouse. The company desires to change to three warehouses to become more centralized and keep the same customer service levels. Determine the average warehouse inventory levels, using the square root rule.

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Business

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4 January, 12:18

A current warehouse system has five warehouses with 4,000 units at each warehouse. The company desires to change to three warehouses to become more centralized and keep the same customer service levels. Determine the average warehouse inventory levels, using the square root rule.

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Leyla · Answer 1

25,768

Explanation:

The square root rule of inventory states that the average inventory level can be calculated by multiplying the total inventory by the square root of the number of future warehouses divided by the number of the current warehouses. It's purpose is to estimate the effect of risk pooling.

Workings

X2 = (X1) * (N2/N1)

Inventory per warehouse = 4000

No of Warehouse = 5

To inventory = 4000*5 = 20,0000

New no of Ware house = 3

20000 (√5/3) =

20000*1.29=25,768