Capturing the Risk-Pooling Effect Through Demand Reshape

The risk-pooling effect has been documented to benefit inventory systems by reducing the need for safety stock and consequently lowering costs such as inventory holding and shortage penalty. In this paper, we propose a new approach, called "demand reshape," to take advantage of the risk-pooling effect. It is demonstrated that a company can improve its profit by encouraging some of its customers, who intended to purchase one product to switch to another. The effectiveness of this approach is evaluated in various scenarios and found to be very promising.