XYZ is a manufacturer of electronics equipment.

The company has a single manufacturing facility in San

Jose, CA. XYZ distributes its product through five regional warehouses located in Atlanta, Boston,
Chicago, Dallas, and Los Angeles. In the current distribution system, the United States is partitioned into
five major markets, each of which is served by a single regional warehouse. Customer, typically retail
outlets, receive items directly from the regional warehouse in their market. That is, in the current
distribution system, each customer is assigned to a single market, and receives deliveries from one
regional warehouse.
The warehouse receive items from the manufacturing facility. Typically, it takes about 2 weeks to satisfy
an order placed by any of the regional warehouses. Currently, XYZ provides their customers with a
service level of about 90%. In recent years, XYZ has seen a significant increase in competition and huge
pressure from their customers to improve the service level and reduce costs. To improve the service level
and reduce costs, XYZ  would like to consider an alternative distribution strategy in which the five regional
warehouses are replaced with a single, central warehouse that will be in charge of all customer orders.
This warehouse should be one of the existing warehouses. The CEO insists that whatever distribution
strategy is used, XYZ will design the strategy so that service level is increased to about 97%.
The following table provides historical data of weekly demand for a typical product for the last 12 weeks in
each of the market areas. An order (placed by the warehouse to the factory) costs $5,550 (per order), and
holding inventory costs $1.25 per unit per week. 

Week

1 2 3 4 5 6 7 8 9 10 11 12

Atlanta  33  45  37  38  55  30  18  58  47  37  23  55 

Boston  26  35  41  40  46  48  55  18  62  44  30  45

Chicago  44  34  22  55  48  72  62  28  27  95  35  45

Dallas  27  42  35  40  51  64  70  65  55  43  38  47

Los  32  43  54  40  46  74  40  35  45  38  48  56

Angeles
Suppose you are comparing the two systems for this product only. Compare the average inventory in
each system. Which system requires less inventory?