Adding locations also has a significant impact on average inventory. Each new
performance cycle added to the system creates the need for an additional safety stock.
The introduction of an additional warehouse to service a specific market area reduces
the size of the statistical distribution used to determine safety stock requirements. In
effect, the size of the market area being serviced by any given facility is reduced with-
out a corresponding reduction in uncertainty. For example, when the demand of sev-
eral markets is aggregated using a single warehouse, the variability of demand is aver-
aged across markets. This allows peaks in demand in one market to be offset by low
demand in another. In essence, the idle stock of one market can be used to meet safety
stock requirements of other markets.
To illustrate, Table 15-4 provides a summary of monthly sales in three markets on
a combined and separate basis. Average sales for the three markets combined is
22 units per month, with the greatest variation above the average in month 6, when
sales reached 29 units, or 7 units over the average. If the goal is to provide 100 percent
protection against stockout and total sales of 29 units have an equal probability of oc-
curring in any month, a safety stock of 7 units would be required.
The average monthly sales for markets A, B, and C are 8, 4, and 10 units
(rounded), respectively. The maximum demand in excess of forecast is in market A,
with 5 units in month 12; for market B, 3 units in month 8; and for market C, 4 units in
month 6. The total of each of these three extreme months equals 11 units. If safety
stocks are planned for each market on a separate basis, I1 units of safety stock would
be required for the total network while only 7 units of safety stock would be required
to service all markets from a single warehouse. An increase in total system safety
stock of 4 units is required as a result of using three warehouses.