Hawkeye Planner  LLC
Get Focused, Stay Sharp, Fly High!
Quick and Dirty Assessment of Inventory Pooling
All Supply Chain people understand the idea of pooling inventory.  Consider two piles of inventory that serve two sets
of customers.  If those two piles of inventory are consolidated into one pile, then that pile can be smaller to serve the
total of those customers.  The reasonable logic is that a larger sample of demand will have less noise (variability), so
less stock is needed to buffer against variation.

The theory sounds good, but Hawkeye Planner wants to apply theory to effective practices.  If a company truly wants
to weigh the costs and benefits of consolidating warehouses, they need analysis, not theory.  Here, then, is the quick
and dirty method to assess inventory savings due to pooling.

Assume that two warehouses are of equal size.  If the demand for each warehouse is perfectly correlated (simply put,
if the demand for the warehouses follows the same pattern for all items) then approximately 30 percent of the
inventory can be reduced by pooling.  Of course, the demand on the two warehouses could be totally independent.  In
that case, there is no zero percent inventory reduction from the consolidation.  So the range for inventory reduction
will be from 0-30 percent, depending on the demand patterns.  For us simple minds, that means a 15 percent
estimate on average.

Of course, some times the two warehouses will not be equal size.  If one warehouse is bigger than the other, the
estimate gets a bit trickier.  The quick and dirty method is to cut off part of the bigger warehouse to make two equal
warehouses.  Then the first quick and dirty method applies.  You can add back the part that was cut off, minus a few
percent points for the pooling effect on it.  The end result is on average in the 10 percent range.

The rest of the assessment is left for you.  Inventory holding cost should be converted to real dollars, including factors
like shrinkage and obsolescence.  The comparison data of transportation and storage cost changes must be
analyzed.  Hopefully, the assumption is that customer service in not changed—the financial impact of service is
difficult at best.  In the end, Hawkeye believes that good decisions come clear after some disciplined thought and
realistic analysis.  Enjoy!


Copyright © 2006-2007 Hawkeye Planner LLC. All rights reserved.