Supply Chain Professionals need to know about Risk Pooling

Your supply chain can deliver more if you are equipped with the right operations strategy. When you have a concrete and solid operations plan, your supply chain will surely be at the top of the game!

Risk Pooling is a theoretical concept that every supply chain manager needs to understand. A better understanding of risk pooling will strengthen your supply chain.

According to Opsrules, 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. Through risk pooling aggregation reduces variability and uncertainty.

Edith Simchi-Levi sited that if the demand is aggregated across different locations, it becomes more likely that high demand from one customer will be offset by low demand from another. The reduction in variability allows a decrease in safety stock and therefore reduces average inventory.

risk-pooling

Here are some of the situations where risk pooling should be considered in making decisions:

1.Transportation

When the products as well as the warehouses are consolidated, the transportation costs becomes cheaper because the shipments can be sent in larger batches.

  1. Product Design

The decisions with regard to the number of choices as well as to the complexity in products can benefit from the risk pooling considerations. When there is less color choices or options the simpler the demand forecast and many aspects of the supply chain since the aggregated demand is easier to determine according to Simchi-Levi of Opsrules.

  1. Postponement

Another thing that Simchi-Levi sited is the postponement. According to her, delayed differentiation in product design by creating a more generic product and adding some of the details once demand is revealed. This allows the use of aggregated demand for the generic product which is much more accurate than the demand for the differentiated products. Benetton is famous for using postponement tactics at the actual sequencing point of the production process, whereby dying of the garments is not completed until the agent network have provided market intelligence on what particular products are in demand in which locations.

  1. Warehouse Location

Decisions concerning the location and number of warehouses should consider the risk of pooling effects. Simichi-Levi added that by centralizing a product in one location, you can take advantage of the aggregated demand. On the other hand, you need to consider proximity to customers and other factors that may push towards maintaining more warehouses. The characteristics of each product also comes into play here as high demand products with low variability are not impacted as much by the risk pooling effect while low volume high variability products are highly vulnerable.

These are just some of the risk pooling situations that you need to consider. If you want to find out more about risk pooling and other techniques on how you can be a better supply chain professional please visit Supply Leaders Academy. You may also join the 3-day Boot Camp of Jack Quinn Solutions to help you become a Certified Professional in Supply Management.