Analysis of the Risk Pooling to Inventory Management for a Three-Stage Supply Chain

Due to obscured information and asynchronous actions, the bullwhip effect suggests that the variability of orders increases while moving upstream in supply chain from warehouse to integrated inventory to supplier. Bullwhip effect amplifies the demand, boosts the inventory and increases the total cost of the supply chain. In order to decrease the stock and improve the efficiency of the supply chain, this paper studies the bullwhip effect on the inventory of three-stage supply chain with and without risk pooling respectively. Through derivation it proves that risk pooling can reduce both safety stock and average inventory of three-stage supply chain whether the three warehouses’ demands are correlated or not. Some other characters of risk pooling are also discussed, which are vital to manage inventory by integrating system.