A producer of dog food is trying to decide whether they should change the number and locations of — their warehouses better meet projected demand over next three years study

This question is meant to get students thinking about the savings from the point of view of a business, to think about data precision and ambiguity of cost estimates.

Many people will naturally assume that these costs are absolute truths and look at the savings from their personal point of view. If you take this view, $500,000 sounds like a lot of money, and you would be foolish to not take it!

However, the answer to this question is that the firm should not make the change. First, the savings, although large to us personally, is small relative to the overall spend—about a 1% decrease. A supply chain manager would think that if they made one mistake in the implementation or the calculations, all these savings would be gone. Second, they are projecting these savings over the next three years. So, their measures for demand and transportation costs have a margin of error of more than 1%. The savings they have found is well within the margin error and is not significant.