Suppose that a company has two of its warehouses that it would like to consolidate into a central warehouse. Three top-selling items stocked in both warehouses are selected for evaluation. From the monthly forecasts of the demand in the two warehouse territories, the following statistics are known:

The product order quantities are determined locally at each warehouse using the EOQ formula and are ordered from separate vendors with an order-processing cost of $25 per order. Replenishment lead times average three weeks, or 0.75 months. Inventory carrying costs are 24 percent per year. The service level during the order cycle is set at 95 percent. How much inventory can be saved through risk pooling if the inventory is consolidated into a central facility?

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WAREHOUSE 1 WAREHOUSE 2 Monthly MonthlyProduct Standard Monthly Standard Demand, Deviation Units Monthly Demand value, Units Deviation, Product Units Units Units S/Unit 500 5,000 9,500 15,000 15 30 25 700 335 8,000 12,500 250 3,500 2500