EXAMPLE 4.33 Aggregating demand in a Supply Chain

To remain competitive, companies worldwide are increasingly recognizing the need to effectively manage their supply chains. Let us consider a simple but realistic supply chain scenario. ElectroWorks is a company that manufactures and distributes electronic parts to various regions in the United States. To serve the Chicago– Milwaukee region, the company has a warehouse in Milwaukee and another in Chicago. Because the company produces thousands of parts, it is considering an alternative strategy of locating a single, centralized warehouse between the two markets—say, in Kenosha, Wisconsin—that will serve all customer orders. Delivery time, referred to as lead time, from manufacturing to warehouse(s) and ultimately to customers is unaffected by the new strategy.

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To illustrate the implications of the centralized warehouse, let us focus on one specific part: SurgeArrester. The lead time for this part from manufacturing to warehouses is one week. Based on historical data, the lead time demands for the part in each of the markets are Normally distributed with

If the company were to centralize, what would be the mean of the total aggregated lead time demand ? Using Rule 2, we can easily find the mean overall lead time demand is