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A distributor is planning to consolidate his two warehouses into a single one. He sells widgets from the warehouse. Each widget costs $100. He estimates that each separate warehouse today faces a mean demand of 1200 per week with standard deviation of 200 per week. The lead time is two weeks. His ordering cost is $100 per order. He plans to build a new warehouse and sell his two old ones. The net cost for doing so is not clear, but he wishes to know what he can afford. His holding cost is 25% per year.
(a) Determine the EOQ and annual inventory cost for each warehouse.
(b) Determine EOQ and annual inventory cost for single warehouse.
(c) Compute difference in safety stock between the 2 systems. Note that combined demand will have a standard deviation = square root (2) x standard deviation of demand at a single warehouse. Assume that the service level needed is 99%.
(d) Compute the cost saving in combining into a single warehouse.
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