Capturing the risk-pooling effect through demand reshape

Capturing the risk-pooling effect through demand reshape

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Article ID: iaor20041966
Country: United States
Volume: 49
Issue: 6
Start Page Number: 704
End Page Number: 717
Publication Date: Jan 2003
Journal: Management Science
Authors: ,
Keywords: risk, demand
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.

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