Network & Optimisation

Risk Pooling & Centralisation

Consolidate stock across stores to cut total safety stock - the square-root pooling law

Decentralised vs Centralised Safety Stock

Pooling benefit shrinks as demand across locations becomes positively correlated (they spike together).

Decentralised SS

Centralised SS

SS reduction

Units saved

Number of stores N 8

Demand std dev per store σ 30

Service level 95%

Demand correlation ρ 0.0

Risk Pooling & Centralisation

Combining demand across locations cuts total safety stock because peaks offset.

Compare N local warehouses with one pool: pooled sigma grows with sqrt(N), not N.

Centralise slow, variable items; keep fast movers close to demand.

pooled safety stock ~ sqrt(N) x local (independent demand)

Risk poolingSquare-root lawCentralisationSafety stock