A distributor of photographic equipment serves retailers in two cities from two warehouses. Retailers are normally supplied from the nearest warehouse to save on transportation expense. Two separate inventories of the same products are held. Although the distributor maintains an average fill rate of 95 percent, occasional stockouts can cause retailers' orders not to be filled or placed on back order. Since it is highly unlikely that an item will be out of stock at both warehouses at the same time, the distributor is contemplating filling out-of-stock orders in one region from the inventory of the other, that is, cross filling the orders. It is possible that system inventories will be less, but the extra transportation cost of shipping from a secondary location must be balanced against the inventory cost reduction.
To test the idea, a camera, worth $400 in inventory, is selected. The extra shipping and handling costs from a secondary warehouse are $12 per camera. Inventory-carrying cost is 20 percent per year. Replenishment lead time on this camera is two months.
The monthly forecast of demand in the first city is an average of 42 cameras with a standard deviation of seven cameras. In the second city, average demand is 75 cameras with a standard deviation of 13 cameras. The two cities combined have an estimated demand of 117 cameras and a standard deviation of √72 + 132 = 15 cameras.
A reorder point method of inventory control is used to control the high-valued inventory and replenishment quantities are determined from the EOQ formula. An inventory turnover of six is currently achieved on a well-run inventory (a = 0.7).
Should the item be cross filled or served only out of the assigned warehouse?