Supply Chain Risk Pooling: Definition & Purpose

Supply Chain Risk Pooling: Definition & Purpose
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  • 0:00 Risk Pooling Defined
  • 1:17 Risk Pooling in Action
  • 2:20 Advantages of Risk Pooling
  • 3:02 Disadvantages of Risk Pooling
  • 3:51 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

As you might expect, there are plenty of risks when it comes to managing a supply chain. So, why in the world would you want to pool those risks? In this lesson, we look at why supply chain risk pooling actually makes sense.

Supply Chain Risk Pooling Defined

Imagine that you run a small chain of hammer stores. Each of your managers buys hammers for his or her store directly from the hammer factory. All hums along quite well until one day one of your hammer stores completely sells out of inventory. The manager frantically calls the hammer factory, but it turns out that they have run out of hammers. A line forms outside that store demanding hammers, and you are frantically calling other stores for their hammers, but they trickle in slowly. Many people are getting frustrated and leave, swearing that they will go to a different hammer store.

Did this have to happen this way? Of course not. Had your company been practicing good supply chain risk pooling, you would have been able to quickly respond to this irregularity in the supply chain. But, what is supply chain risk pooling?

Supply chain risk pooling refers to the practice of consolidating as much of a business's supply chain as possible into one flow. In other words, it's putting all your eggs in one basket. In this lesson, we'll look at the advantages and disadvantages of supply chain risk pooling and how to fix the example scenario's hammer stores to be able to avoid such mistakes in the future.

Supply Chain Risk Pooling in Action

So what would your chain of hammer stores look like with effective supply chain risk pooling? Simply put, you'd need a distribution center, a central warehouse that holds most of the inventory. Your stores were all buying directly from the factory, so that would change to having a single buyer negotiate hammers on behalf of all the stores in your company. Those hammers would be held at the distribution center until they were needed by each individual store, set to its own unique demand.

Let's go back to that demand shock we saw when a store sold out of hammers. The manager was frantically on the phone trying to get a few hammers from each store, hoping that it would allow the store to meet the demand. This is a waste of time and resources. Not only is it a waste of time to look for those hammers, but it is a waste of resources to send trucks to each store to only get a few boxes from each. With the new system, a call to the distribution center results in a new shipment with one truck. One truck, one call, one delivery - it already sounds more efficient, doesn't it?

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