The square root rule suggests that all things being equal (e.g., same demand, same variation, …), the firm’s aggregate safety stock by changing from one- into two-warehouse system will increase by 1.41 Conversely, by setting up one central warehouse (which you can think of it as setting up a distribution center) will help save inventory as demonstrated when we discussed the topic of distribution centers. We called it “risk pooling,” a form of postponement at that time. Another type of “postponement” is to delay differentiation point. For example, when producing cars, colors are painted at a very late stage in the production line; and regardless of color of the vehicles, they all share the same parts (parts commonality) so long as cars of two different colors belong to the same model-year. Use the square root rule to illustrate the effect of parts commonality between two products (e.g., cars) on the averaged inventory vs. when no part commonality is used
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