Inventory Risk Pooling

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Inventory risk pooling can be used to reduce inventory levels. This is the concept that safety stock levels can be reduced for parts that are used in a large number of products, because fluctuations in the demand levels of parent products will offset each other, resulting in a lower safety stock level.

For example, engineers are usually instructed to use common parts in more than one product, so that fewer total parts can be stocked (another inventory reduction technique). A useful side benefit of this approach is that the fluctuations in the demand levels of a single part by multiple parent products will offset each other. This results in a smaller standard deviation in usage levels for a part having multiple sources of demand, as opposed to the usage deviation for parts with fewer sources of demand.

In order to reduce safety stock levels for parts having multiple sources of demand, use a simple trial-and-error approach of determining the actual stockout level of these items over a rolling three-month period, and gradually reducing the in-stock balance until the mandated service level is reached. For these items, the safety stock level will likely be substantially below the average corporate safety stock level.