Problem: Consider a paint retailer who sells 100 different colors of paint. Assume that weekly demand for each color is independent and is normally distributed with a mean of 30 and a standard deviation of 10. The replenishment lead time from the paint factory is two weeks and the retailer aims for a CSL 0.95. How much safety stock will the retailer have to hold if paint is mixed at the factory and held in inventory at the retailer as individual colors? How does the safety stock requirement change if the retailer holds base paint (supplied by the paint factory) and mixes colors on demand?
Explain the underlying principle that helps lower the safety stock through delayed differentiation of products. Describe another example of lowering safety stock based on the same principle.