How do you measure the benefits of inventory pooling across different product categories?

1 What is inventory pooling?

Inventory pooling is a form of risk pooling, which is a general principle that states that the variability of the total demand for a group of items is lower than the sum of the variabilities of the individual demands. This means that by aggregating demand across different items, you can reduce the uncertainty and fluctuations that affect your inventory decisions. Inventory pooling applies this principle by sharing inventory across different product categories that have similar demand patterns, such as seasonality, trends, or customer preferences. For example, if you sell clothing, you can pool inventory across different styles, colors, or sizes that have similar demand curves throughout the year.

2 Why pool inventory across product categories?

Pooling inventory across product categories can offer several advantages, such as lower inventory costs, higher service levels, and greater flexibility and responsiveness. With pooled inventory, you can reduce the safety stock needed to cover the demand variability for each product category, as well as the holding and ordering costs associated with maintaining separate inventory levels. Furthermore, you can increase the availability and fill rate of your products, as you can use the pooled inventory to satisfy the demand for any product category that faces a shortage or a spike in demand. Additionally, pooling inventory allows for more rapid adaptation to changes in demand or supply conditions, as you can allocate the pooled inventory to the most profitable or urgent product categories or to the most convenient or accessible locations or channels.

3 How to pool inventory across product categories?

When pooling inventory across product categories, you should consider the similarity of demand patterns, the substitutability of products, and the cost and benefit trade-offs. If demand patterns are similar or complementary, such as with seasonality, trends, or customer preferences, pooling can reduce the demand variability and the risk of mismatch between supply and demand. Additionally, if products are highly substitutable, customers are more likely to accept or switch to alternative products in case of unavailability or preference, which can increase customer satisfaction and loyalty. Finally, you should ensure that the net benefit from pooling is positive in order to optimize inventory planning and performance; this means that the savings from lower inventory costs and higher service levels should outweigh the costs of pooling.

4 How to measure the benefits of inventory pooling across product categories?

To measure the benefits of inventory pooling across product categories, you need to compare the inventory performance indicators before and after pooling. This includes inventory turnover, which is the ratio of the cost of goods sold to the average inventory value and measures how efficiently you use your inventory to generate sales. By pooling inventory, you can increase your inventory turnover as you can reduce your average inventory value while maintaining or increasing your sales. Additionally, you can look at inventory days, which is the number of days that your average inventory value can cover your average daily sales. By pooling, you can decrease your inventory days as you can reduce your average inventory value while maintaining or increasing your average daily sales. Lastly, fill rate is the percentage of customer orders that are fulfilled from your available inventory and measures how well you satisfy customer demand with your inventory. Pooling can help increase fill rate as you can use pooled inventory to meet demand for any product category that faces a shortage or a spike in demand.