Sandy Clearwater and Sons currently owns 2 warehouses in Albany and Charlotte to store its products before shipping them out to various retail customers across the eastern United States. The owner is considering changing to 1 centralized warehouse in Richmond to service all of their retail customers and is curious to know the impact this will have on their system inventories. Their current average inventory level is approximately 3,300 units at each warehouse. They have found that this level of stock will result in warehouse stockouts approximately 1% of the time.
-What is their inventory reduction, in order to keep their current service level?

Question

Quizplus · Accepted Answer

The correct answer is C: 29.29%.The inventory reduction can be calculated using the formula:Inventory reduction = (Current inventory level - New inventory level) / Current inventory levelThe new inventory level can be calculated using the formula:New inventory level = Current inventory level * (1 - Service level)The service level is the percentage of time that the warehouse will not have a stockout. In this case, the service level is 1%.Therefore, the new inventory level is:New inventory level = 3,300 units * (1 - 0.01) = 3,267 unitsThe inventory reduction is:Inventory reduction = (3,300 units - 3,267 units) / 3,300 units = 0.2929 = 29.29%

Sandy Clearwater and Sons Currently Owns 2 Warehouses in Albany