Pooling Risk

The second technique for advancing the efficient frontier is risk pooling. The idea behind risk pooling is to combine the management of inventories that would otherwise be controlled separately so that variability in demand can be handled with less safety stock.

To see how this works, take a look at Figure 15.3, which compares the inventory levels required to meet a 97% customer service level (CSL) with either three regional inventories or a single, centralized inventory. With regional inventories, each region has to have 150 units of a product on hand in order to meet the target CSL, for a total of 450 units. With a centralized inventory, only 300 units are required.

Figure 15.3. Risk Pooling

What accounts for the difference? The ...

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