Risk pooling: Case study) Pip Boys (motto: "Cars tolerate us, people are getting used to us") currently holds inventories in distribution centers (DCs) in five regions of the continental United States-Northeast, Southeast, North Central, South Central, and West-to supply its many retail stores across the country. As the rising star in her organization, you have been asked by Sandy McNeill, the V.P. of Logistics at Pip Boys, to determine whether it would be beneficial to centralize the stocking of some items and hold them only in the North Central DC in Omaha. Ms. McNeill has suggested that you first consider two specific SKUs, the Zippy Spark Plug, and the Control-Tac Leather-wrapped Steering Wheel.
The necessary data is given in Tables 5.28 and 5.29. Assuming that the regional demands are independent and the company continues to maintain the same 97.5% service level, answer the following:
(a) Determine the current levels of safety stock for the two components at each of the five regional DCs.
(b) Determine the safety stock that would result from centralization, i.e., hold them only in North Central Omaha DC.
(c) Compare the annual savings due to centralization for each component using the following measures.
(i) Total safety stock
(ii) Safety stock holding cost
(iii) Cost savings as a percent of the annual material cost
(d) Is there a significant difference in savings as a percent of the annual material cost? Explain the reason.