Risk Pooling

Fig: Areas where Risk Pooling can be implemented

Supply chain risk pooling refers to the practice of consolidating as much of a business's supply chain as
possible into one flow. It helps us comprehend the impact of adding more products, options,
warehouses and any other complexity into the firm’s operations. It is a statistical concept that suggests
that the demand variability is reduced if one can aggregate demand, for example, across locations,
across products or even across time. It tells us that aggregation reduces variability and uncertainty. For
example, if demand is aggregated across different locations, it becomes more likely that high demand
from one customer will be offset by low demand from another. This reduction in variability allows a
decrease in safety stock and therefore reduces average inventory.