Got asked what would happen to inventory when the number of stocking locations change. I thought for a minute and remembered a quick rule of thumb … The Inventory Square Root Law states that …
Average inventory increases proportionally to the square root of the number of locations in which inventory is held.
X2 = (X1) * √ (n2/n1)
n1 = number of existing facilities
n2 = number of future facilities
X1 = existing inventory
X2 = future inventory
Here’s an example:
Current inventory is 4000 units, 2 facilities grow to 8. Using the square root law the future inventory = (4000) * √ (8/2) = 8000 units.
* The Square Root Law was mathematically proven by D.H. Maister in his 1975, International Journal of Physical Distribution article entitled “Centralization of Inventories and The Square Root Law.”