The Square Root Rule

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Were you told there would be no math?


This technique is useful in determining the effect on total inventory levels when adding or reducing distribution centers.

The analysis assumes that total demand remains unchanged. The goal of this analysis is to approximate the aggregate inventory at multiple facilities by multiplying the square root of the number of facilities by the inventory previously stored at a single facility. X2= (X1) (Square root of n2/n1) where n1= number of existing facilities n2= number of future facilities where n2>n1 X1= total inventory in existing facilities X2= total inventory in future facilities

Example: A company distributes product to its customers in the southeastern US from a single facility in Atlanta, GA. It is considering opening a second facility in Nashville, TN to help serve the same market. Assume that average inventory levels at the Atlanta facility are 10,000 units. n1= 1 existing facility n2= 2 future facilities X1= 10,000 total units in the existing facility X2= total inventory in future facilities = (10,000) (Sq root of 2/1) = (10,000) (1.4142) = 14,142 units