Risk Pooling
Risk Pooling
Risk pooling concept is explained in the case study considering the examples of two warehouses located in Massachusetts and New Jersey. When we inherit Centralized Distribution System (single warehouse for distribution) we can see the benefits of risk pooling, provided there is a negative correlation in the demands for different products in the market. When the demand for two different products varies, we have the inventory to support the demand for a product which is high and so we offset the demand for the other product which is low. This is the primary advantage with risk pooling. But when we can see a demand for both the products to be higher than the average or lower than the average market demand, risk pooling advantages gradually decrease.
Lead Time and Lead Time Variability: Lead time, however in this case study is considered to be same even though they take a centralized distribution system or a current multiple warehouse distribution system. But Lead time can be reduced if we avoid a Centralized Distribution System. The reason being, if there are multiple warehouses it may be closer to the retailers to get the product faster. Coming to lead time variability‘s impact on inventory we should again consider it with Centralized Distribution System or the one taken in the case study. The variability would be much lower with the Centralized Distribution System compared to the combined variabilities faced by the existing warehouse. With this we can see a major impact on the inventory levels.
Effective Inventory Management Policy: Even though Effective Inventory management Policy is not specifically discussed, we can see in the first page that ACME’s current distribution strategy provides a 97% service level and that is the management policy they have employed for each warehouse. We should be wise enough to decide the Centralized Distribution System or the Decentralized distribution System because that shows a great effect on the inventory
Risk pooling concept is explained in the case study considering the examples of two warehouses located in Massachusetts and New Jersey. When we inherit Centralized Distribution System (single warehouse for distribution) we can see the benefits of risk pooling, provided there is a negative correlation in the demands for different products in the market. When the demand for two different products varies, we have the inventory to support the demand for a product which is high and so we offset the demand for the other product which is low. This is the primary advantage with risk pooling. But when we can see a demand for both the products to be higher than the average or lower than the average market demand, risk pooling advantages gradually decrease.
Lead Time and Lead Time Variability: Lead time, however in this case study is considered to be same even though they take a centralized distribution system or a current multiple warehouse distribution system. But Lead time can be reduced if we avoid a Centralized Distribution System. The reason being, if there are multiple warehouses it may be closer to the retailers to get the product faster. Coming to lead time variability‘s impact on inventory we should again consider it with Centralized Distribution System or the one taken in the case study. The variability would be much lower with the Centralized Distribution System compared to the combined variabilities faced by the existing warehouse. With this we can see a major impact on the inventory levels.
Effective Inventory Management Policy: Even though Effective Inventory management Policy is not specifically discussed, we can see in the first page that ACME’s current distribution strategy provides a 97% service level and that is the management policy they have employed for each warehouse. We should be wise enough to decide the Centralized Distribution System or the Decentralized distribution System because that shows a great effect on the inventory