First introduced in the supply chain context in Designing and Managing the Supply Chain, 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.
This is really a statistical concept that suggests 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.
Several examples where risk pooling should be considered when making decisions:
1) Inventory Management – as mentioned above the less variability in demand the less
safety stock is required to buffer against fluctuations. In addition, the more consolidated
the inventory, the easier it is to manage overall and the less risk of obsolescence.

2) Warehouse location and product flow - the decisions on whether to have many
warehouses close to the customers or more centralized locations should consider the risk
pooling effects. 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

3) Transportation - the more consolidated the products and the warehouses are, the cheaper the
transportation costs as shipments can be sent in larger batches. Therefore considering the
transportation impact on these decisions is important.
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5) Postponement - 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.
6) Product design – decisions on the number of choices and complexity in products can benefit
from risk pooling considerations – the less color choices or other options the simpler the demand
forecast and many other aspects of the supply chain since the aggregated demand is easier to
determine
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Push System Vs. Pull System Inventory Control
The Push System of Inventory Control

The push system of inventory control involves forecasting inventory needs to meet customer
demand. Companies must predict which products customers will purchase along with
determining what quantity of goods will be purchased. The company will in turn produce enough
products to meet the forecast demand and sell, or push, the goods to the consumer.

An example of a push system is Materials Requirements Planning, or MRP. MRP combines the
calculations for financial, operations and logistics planning. It is a computer-based information
system which controls scheduling and ordering. It's purpose is to make sure raw goods and
materials needed for production are available when they are needed.
Disadvantages of the Push System

Disadvantages of the push inventory control system are that forecasts are often inaccurate as
sales can be unpredictable and vary from one year to the next. Another problem with push
inventory control systems is that if too much product is left in inventory. This increases the
company's costs for storing these goods. An advantage to the push system is that the company is
fairly assured it will have enough product on hand to complete customer orders, preventing the
inability to meet customer demand for the product.
Pull System of Inventory Control

The pull inventory control system begins with a customer's order. With this strategy, companies
only make enough product to fulfill customer's orders. One advantage to the system is that there
will be no excess of inventory that needs to be stored, thus reducing inventory levels and the cost
of carrying and storing goods.

An example of a pull inventory control system is the just-in-time, or JIT system. The goal is to
keep inventory levels to a minimum by only having enough inventory, not more or less, to meet
customer demand. The JIT system eliminates waste by reducing the amount of storage space
needed for inventory and the costs of storing goods.
Disadvantages of the Pull System

One major disadvantage to the pull system is that it is likely that a company will run into
ordering dilemmas, such as a supplier not being able to get a shipment out on time. This leaves
the company unable to fulfill the order and contributes to customer dissatisfaction.
Push-Pull System

Some companies have come up with a strategy they call the push-pull inventory control system,
which combines the best of both the push and pull strategies. Push-pull is also known as lean
inventory strategy. It demands a more accurate forecast of sales and adjusts inventory levels
based upon actual sale of goods. The goal is stabilization of the supply chain and the reduction of
product shortages which can cause customers to go elsewhere to make their purchases.

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What Is Economic Order Quantity – EOQ?

Economic order quantity (EOQ) is the ideal order quantity a company should purchase for
its inventory given a set cost of production, a certain demand rate, and other variables. This is
done to minimize inventory holding costs and order-related costs.

The equation for EOQ also takes into account inventory holding costs such as storage, ordering
costs and shortage costs. over time. The formula assumes that demand, ordering, and holding
costs all remain constant.

EOQ= Square root 2 x ds/h

D= Demand in units, s= Ordering cost & H = holding cost

The goal of the EOQ formula is to identify the optimal number of product units to order so that a
company can minimize its costs related to buying, taking delivery of and storing the units. EOQ
is an important cash flow tool for management to minimize the cost of inventory and the amount
of cash tied up in the inventory balance. For many companies, inventory is the largest asset
owned by the company, and these businesses must carry sufficient inventory to meet the needs of
customers. If EOQ can help minimize the level of inventory, the cash savings can be used for
some other business purpose or investment.

Assume, for example, a retail clothing shop carries a line of men’s jeans and the shop sells 1,000
pairs of jeans each year. It costs the company $5 per year to hold a pair of jeans in inventory, and
the fixed cost to place an order is $2.

The EOQ formula is the square root of (2 x 1,000 pairs x $2 order cost) / ($5 holding cost) or
28.3 with rounding. The ideal order size to minimize costs and meet customer demand is slightly
more than 28 pairs of jeans. A more complex portion of the EOQ formula provides the reorder
point.