Benefiting from the risk-pooling effect: internal (component commonality) vs. external (demand reshape) efforts
by Amit Eynan, Thierry Fouque
International Journal of Services and Operations Management (IJSOM), Vol. 1, No. 1, 2005

Abstract: Faced with uncertain demand for their products companies bear the associated burdens such as holding cost, spoilage and shrinkage for excess inventory and lost sales, expediting cost and shortage penalty upon stockouts. Consequently, much attention and effort are channelled toward the reduction of these costs. Component commonality promotes this endeavour by designing products to share some of their components. Consequently, the variability of demand for the components is reduced followed by a decrease in the management cost of materials. A recently introduced approach is demand reshape where firms attempt to influence some consumers to switch to a different product even though their original choice is available. Consequently, total variability of demand for the products is reduced as well as inventory management costs. As both approaches rely on the risk pooling effect to gain benefits, we explore the efficiencies of the two approaches; we compare performance and also investigate the potential benefits of employing both simultaneously.

Online publication date: Sat, 19-Feb-2005

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