In a study published in the journal IISE Transactions, Yale T. Herer at the Technion-Israel Institute of Technology and I assessed and compared the costs of various pooling approaches as the number of stocking locations grows. Our analysis, which differs from other studies by factoring in certain costs associated with physical pooling, shows that as long as transshipment costs are no more than five times the physical pooling costs, information pooling is more attractive.
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It’s frustrating for customers to be told that a coveted mobile phone is out of stock, or worse, be bumped off an overbooked flight. Disgruntled consumers could turn to rival products or hurt the business’s reputation with negative reviews. But holding excess stock to avoid disappointing customers isn’t a solution because it also incurs costs in the form of storage, spoilage, or working capital requirements.
Information pooling, on the other hand, doesn’t incur additional per-location costs. It also helps offset the costs of holding too much or too little stock across locations. Our analysis shows that, as the number of locations increases, information pooling trumps physical pooling whenever transshipment cost per item is less than five times the cost of shipping it from a central hub.
Although physical pooling has been widely adopted by companies to reduce costs and improve customer service, merging stock locations can be expensive upfront. Besides building a centralized and more technologically sophisticated facility, the company also must close existing warehouses, transfer existing stocks, implement a new workflow, and even relocate workers. These are known collectively as additional per-location costs.
Published: Thursday, September 14, 2023 – 12:02