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Question 193 - CSCP discussion

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When multiple warehouses are combined into one centralized warehouse, the requirement for safety stock is reduced because:

A.
there is less in-transit inventory.
Answers
A.
there is less in-transit inventory.
B.
the total variability of demand is reduced.
Answers
B.
the total variability of demand is reduced.
C.
average cycle stock is reduced.
Answers
C.
average cycle stock is reduced.
D.
safety stock becomes available-to-promise.
Answers
D.
safety stock becomes available-to-promise.
Suggested answer: B

Explanation:

When multiple warehouses are combined into one centralized warehouse, the requirement for safety stock is reduced because the total variability of demand is reduced. This involves:

Demand Aggregation: Centralizing inventory consolidates demand from multiple locations, which tends to smooth out fluctuations and reduce overall variability.

Economies of Scale: Centralized warehousing benefits from economies of scale, reducing the need for high levels of safety stock to buffer against variability.

Improved Forecasting: With aggregated demand data, forecasting accuracy improves, allowing for more precise inventory management and lower safety stock requirements.

Risk Pooling: Combining inventories from multiple locations spreads the risk of stockouts and overstock across a larger pool, further reducing the need for safety stock.

'Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies' by David Simchi-Levi, Philip Kaminsky, and Edith Simchi-Levi

APICS, 'Inventory Management and Demand Variability Reduction Strategies'

asked 16/09/2024
Slavomir Ugrevic
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