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The value of SKU rationalization: the pooling effect under suboptimal inventory policies

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  • Corbett, Charles J.
  • Alfaro, José A.

Abstract

Managing product variety is a widely recognized challenge. Several approaches to this rely on the "pooling effect", the reduction of uncertainty that occurs when individual demands are aggregated. This can occur through reduction of number of products orSKUs, through postponement of differentiation, or in other ways. These approaches are by now well-known and widely applied in practice. However, theoretical analyses of the pooling effect always assume that one has an optimal inventory policy before and after pooling. If this is not the case, how does that affect the value of pooling? This paper analyses the benefits of pooling in terms of costs and service level under optimal and suboptimal policies and proposes a simple framework to analyze the trade-off between implementing pooling and improving inventory policy. We show there is always a range of current inventory levels within which pooling is better and beyond whichoptimizing inventory policy is better. We analyze how this range varies with the problem parameters and illustrate these findings using highly erratic empirical demand data.

Suggested Citation

  • Corbett, Charles J. & Alfaro, José A., 2000. "The value of SKU rationalization: the pooling effect under suboptimal inventory policies," DEE - Working Papers. Business Economics. WB 9917, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
  • Handle: RePEc:cte:wbrepe:9917
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    References listed on IDEAS

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    1. George Tagaras & Morris A. Cohen, 1992. "Pooling in Two-Location Inventory Systems with Non-Negligible Replenishment Lead Times," Management Science, INFORMS, vol. 38(8), pages 1067-1083, August.
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    7. H. Jönsson & E. A. Silver, 1987. "Analysis of a Two-Echelon Inventory Control System with Complete Redistribution," Management Science, INFORMS, vol. 33(2), pages 215-227, February.
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    9. Jayashankar M. Swaminathan & Sridhar R. Tayur, 1998. "Managing Broader Product Lines through Delayed Differentiation Using Vanilla Boxes," Management Science, INFORMS, vol. 44(12-Part-2), pages 161-172, December.
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    Cited by:

    1. Lingxiu Dong & Nils Rudi, 2004. "Who Benefits from Transshipment? Exogenous vs. Endogenous Wholesale Prices," Management Science, INFORMS, vol. 50(5), pages 645-657, May.
    2. Jing-Sheng Song & Yao Zhao, 2009. "The Value of Component Commonality in a Dynamic Inventory System with Lead Times," Manufacturing & Service Operations Management, INFORMS, vol. 11(3), pages 493-508, March.
    3. Saif Benjaafar & William L. Cooper & Joon-Seok Kim, 2005. "On the Benefits of Pooling in Production-Inventory Systems," Management Science, INFORMS, vol. 51(4), pages 548-565, April.
    4. Charles J. Corbett & Kumar Rajaram, 2006. "A Generalization of the Inventory Pooling Effect to Nonnormal Dependent Demand," Manufacturing & Service Operations Management, INFORMS, vol. 8(4), pages 351-358, August.

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    Keywords

    Pooling;

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