Supernova Rubber Co. wants to switch to a more decentralized warehousing system. They currently have 1 central warehouse with 15,000 tires. If they go to a 7-warehouse system, what would be the impact on inventory, given that they wish to maintain the same stockout levels?
A)63,246
B)47,434
C)39,686
D)34,641
E)44,721

Question

Quizplus · Accepted Answer

Decentralizing warehouses typically requires more inventory to maintain the same service level due to increased variability and reduced pooling benefits. The square root law of inventory suggests that the total inventory required is proportional to the square root of the number of warehouses. Therefore, the new inventory level can be calculated as: New Inventory = Old Inventory * sqrt(New Warehouses / Old Warehouses) = 15,000 * sqrt(7/1) = 39,686.