Inventory risk pooling strategy for the food distribution network in Korea

Today's business environments are characterised by the high degree of volatility and risk due to fast changing customer behaviours and increasingly diversified product lines. Since the volatility and risk are often triggered by demand variability, growing efforts are made to control demand variability. One of such efforts includes inventory risk pooling which aims to reduce inventory variability by aggregating customer demand across products, time, and location. The success of inventory risk pooling, however, hinges on its ability to consolidate inventory at the central location of a supply chain network. To help supply chain professionals formulate a wise inventory risk pooling strategy, this paper redesigns a warehouse network in such a way that it increases inventory turnover, reduces the risk of inventory obsolescence/shortage/surplus, allocates inventory to field warehouses closer to highly concentrated customer bases, and centralises inventory stocking locations for the aggregated demand. To solve this complex distribution network redesign problem, we propose a simulation model and test its validity by applying it to an actual distribution problem encountering the consumer packaged goods manufacturer in Korea, which produces and distributes food products. [Received: 14 August 2017; Accepted: 30 June 2020]