Risk Pooling Case Study

Risk Pooling Strategy

Risk pooling is a statistical concept that suggests that demand variability is reduced if one can aggregate demand, for example, across locations, across products or even across time. Berman et.al, 2011 defined risk pooling in inventory management refers to the consolidation of inventory across locations into a single (real or virtual) location, from which the demands at the individual locations are served. Since one of the primary functions of the inventory is to protect the system against the variability in demand, one would intuitively expect inventory pooling to be beneficial, as the centralized location faces less demand variability. As the demand from various location is aggregated, it becomes more likely that the

The transportation cost is subjective as in centralized system the transportation cost from manufacturing facility and supplier increase while in decentralized system the transportation cost increases due to high number of warehouses. The transportation cost varies from situation-to

Although the risk pooling strategy is considered for supply chain management in the previous research such as Gerchak and He (2003), and Miranda and Garrido (2004), they do not consider the inventory holding costs at retailers, and argue that the effect of risk pooling becomes more significant as the inventory holding costs at the warehouses and the variances of the demands increase. Note that the risk pooling strategy may cause an increase in the inventory holding costs at the retailers and the transportation costs from the warehouses to the retailers, since the lead times of the retailers and the distances between ware- houses and retailers may be increased. Since the bargaining power of the retailers is not negligible but rather significant nowadays, the costs incurred at both the retailers’ side and the supplier’s side should be considered simultaneously (as was done in this study) to reduce the overall cost of the whole supply chain and to improve the partnership between the supplier and