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Capturing the Risk-Pooling Effect Through Demand Reshape

Author

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  • Amit Eynan

    (John M. Olin School of Business, Washington University, St. Louis, Missouri 63130)

  • Thierry Fouque

    (Department of Economics, Management, Mathematics, and Computer Sciences, University of Paris X, 92000 Nanterre Cedex, France)

Abstract

The risk-pooling effect has been documented to benefit inventory systems by reducing the need for safety stock and consequently lowering costs such as inventory holding and shortage penalty. In this paper, we propose a new approach, called "demand reshape," to take advantage of the risk-pooling effect. It is demonstrated that a company can improve its profit by encouraging some of its customers, who intended to purchase one product to switch to another. The effectiveness of this approach is evaluated in various scenarios and found to be very promising.

Suggested Citation

  • Amit Eynan & Thierry Fouque, 2003. "Capturing the Risk-Pooling Effect Through Demand Reshape," Management Science, INFORMS, vol. 49(6), pages 704-717, June.
    • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:6:p:704-717
    DOI: 10.1287/mnsc.49.6.704.16020
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    References listed on IDEAS

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    1. Gary D. Eppen, 1979. "Note--Effects of Centralization on Expected Costs in a Multi-Location Newsboy Problem," Management Science, INFORMS, vol. 25(5), pages 498-501, May.
    2. Kenneth R. Baker & Michael J. Magazine & Henry L. W. Nuttle, 1986. "The Effect of Commonality on Safety Stock in a Simple Inventory Model," Management Science, INFORMS, vol. 32(8), pages 982-988, August.
    3. Yigal Gerchak & Michael J. Magazine & A. Bruce Gamble, 1988. "Component Commonality with Service Level Requirements," Management Science, INFORMS, vol. 34(6), pages 753-760, June.
    4. Eynan, Amit, 1999. "The multi-location inventory centralization problem with first-come, first-served allocation," European Journal of Operational Research, Elsevier, vol. 114(1), pages 38-49, April.
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    Cited by:

    1. Shah, Janat & Avittathur, Balram, 2007. "The retailer multi-item inventory problem with demand cannibalization and substitution," International Journal of Production Economics, Elsevier, vol. 106(1), pages 104-114, March.
    2. Su, Ping & Tian, Zhongjun & Wang, Haiyan, 2012. "On service degrade at a discount: Capacity, demand pooling, and optimal discounting," Omega, Elsevier, vol. 40(3), pages 358-367.
    3. Hsieh, Ying-Jiun, 2011. "Demand switching criteria for multiple products: An inventory cost analysis," Omega, Elsevier, vol. 39(2), pages 130-137, April.
    4. Zhang, Yi & Hua, Guowei & Cheng, T.C.E. & Zhang, Juliang & Fernandez, Vicenc, 2020. "Risk pooling through physical probabilistic selling," International Journal of Production Economics, Elsevier, vol. 219(C), pages 295-311.
    5. Zhang, Yi & Hua, Guowei & Wang, Shouyang & Zhang, Juliang & Fernandez, Vicenc, 2018. "Managing demand uncertainty: Probabilistic selling versus inventory substitution," International Journal of Production Economics, Elsevier, vol. 196(C), pages 56-67.
    6. Hsun Chuan Cho & Ying Jiun Hsieh & Lan Ying Huang, 2018. "Capturing the Risk-Pooling Effect through Inventory Planning and Demand Switching," Sustainability, MDPI, vol. 10(11), pages 1-14, November.

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