Risk pooling

Third, climate change-related risks may be correlated and create a skewed risk pool that could increase the probability of extremely large losses and also risks not well-distributed across existing insurers. 

Kulkarni SS, Magazine MJ, Raturi AS (2004) Risk Pooling Advantages of Manufacturing Network Configuration. Production and Operations Management 13 186-199... 

In a distribution supply chain, products flow out in a fan-shaped structure to the retailers. Consider the example of a warehouse and retailers in Figure 2.2. Even if the retailers serve independent markets, the retail supplies are linked because the warehouse inventory policy affects the supply to otherwise independent retailers. But the presence of the warehouse may generate significant benefits to the supply chain by enabling bulk commitments by the wholesaler or plant, which can deliver to the warehouse, followed by a distribution to retailers as their demands unfold. The warehouse thus offers the benefits of demand risk pooling and enables geographic postponement of the deliveries to retailers. We will analyze the impact of such risk pooling in Section 2.3. 

Distribution Supply Chains Risk Pooling and Inventory Impact... 

Promotion A term used by CGR Management Consultants to describe risk pooling to lower inventories. In promotion, products, product families, or SKUs are moved higher in the product tree (promoted) to concentrate demand. 

In terms of specific applications to the SCM, Hartman et al. (2000) considered the newsvendor centralization game, i.e., a game in which multiple retailers decide to centralize their inventory and split profits resulting from the benefits of risk pooling. Hartman at al. (2000) further show that this game has a non-empty core under certain restrictions on the demand distribution. Muller et al. (2002) relax these restrictions and show that the core is always non-empty. Further, Muller et al. (2002) give a condition under which the core is a singleton. 

Single channel type systems under manufacturer control. In this class of literature the product stops at intermediate points between a manufacturer and its end customers, for instance at distribution centers or depots. These locations add value in a variety of ways, including risk pooling of demand uncertainty across multiple retail locations, lower produc-... 

Next we apply these integer programming models to different supply chain network optimization problems, including warehouse location, network design, and distribution problems. The topic of risk pooling or inventory consolidation is presented next. In this portion of the chapter. 

We will save the discussion of production planning models, however, for Chapter 5, based on the similarity of that problem to the facility location and location-allocation problems discussed in that chapter. Also in Chapter 5, we introduce the notion of risk pooling, which is a means of reducing the safety stock required to support a target service level by aggregating demands across multiple sources, for example across multiple customers or customer regions supported by a single facility. 

Next, we discuss an important aspect of supply chain network design, called Risk Pooling. Risk pooling refers to the use of a more consolidated distribution network with fewer facilities, each serving a large allocation of customer demand. A consolidated distribution system reduces supply chain costs—inventory holding cost (IHC), order costs, and facilities cost. However, customer service suffers, as time to fulfill customer demand increases. We will study the tradeoff between supply chain cost and customer service under risk pooling. 

We shall illustrate the principles of risk pooling with a simple example. Consider a 3-stage supply chain network shown in Figure 5.6. The factory... 

Note that option 1 is the risk pooled alternative. Let us now look at the impact on the following supply chain metrics under each option ... 

Key Result Total inventory in the supply chain, under option 2, increases -Jl times of the amount under risk pooling (option 1), i.e., a 40% increase in inventory carried in the supply chain for the northeast region ... 

In Sections 5.3.1 and 5.3.2, we derived the benefits of risk pooling, assuming equal distribution of demand among the warehouses. This was done primarily for ease of calculations and to estimate quickly the exact reduction in inventory and number of orders. However, the demands do not have to be distributed evenly among the DCs. When customer demands are divided unequally, the average inventory for each DC has to be calculated based on its share of the demand, in order to calculate the total inventory in the supply chain. Still, the final results, namely the reduction in supply chain inventory and annual orders, will be true. 

Let us now summarize the advantages and drawbacks of the risk pooling strategy, which consolidates customer demands by using fewer warehouses for distribution. 

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