The Square Root Law (Inventory at various locations)
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Modern logistical management strives to reduce inventory levels in the logistical network without sacrificing customer satisfaction. As the number of locations reduces, inventory in the net work also reduces, but reducing inventory beyond a certain level would certainly affect customer satisfaction. The square root law shows the amount of inventory one should hold at the new number of locations to maintain the same level of customer satisfaction. If a company decides to change the number of inventory locations as a part of their strategy, they can find out the inventory volume needed to be stored in new facilities.
The square root law states that the total safety stock inventories in a future number of facilities can be approximated by multiplying the total amount of inventory at existing facilities by the square root of the number of future facilities divided by the number of existing facilities. If a company distributes 40,000 units using 8 existing facilities and plans to reduce the number of facilities to 2, then what should be the inventory in two of their future facilities? If we use the square root formula, the answer is 20,000(= 40000 x (2/8))
X2 =[x l] [n2/n1]
X1 = total inventory in existing facilities
X2 = total inventory in future facilities
n1 = number of existing facilities [warehouses]
n2 = number of future facilities [warehouses]
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