A retailer that operates a three-level distribution network is considering eliminating one level in the network and shipping directly from the regional warehouses to the retail outlets. Which of the following outcomes is most likely to result?
A retailer that operates a three-level distribution network is considering eliminating one level in the network and shipping directly from the regional warehouses to the retail outlets. Which of the following outcomes is most likely to result?
Eliminating one level in the distribution network and shipping directly from the regional warehouses to the retail outlets will decrease risk pooling benefits. Risk pooling is a strategy used to manage uncertainty in demand and supply by pooling varies resources to reduce risk. When a level in the distribution network is removed, the diversification in the supply chain decreases, thereby reducing the advantages of risk pooling.
Risk pooling is a strategy in which companies share the risk of disruptions in their supply chains. By having multiple distribution centers, retailers can pool their inventory risk and avoid stockouts in the event of a disruption at one of their warehouses.
The benefits of risk pooling will diminish. By eliminating one tier in the distribution network, the retailer is decreasing diversification in its supply chain. This can reduce the benefits of risk pooling, which is a strategy used to manage uncertainty in demand and supply by pooling varied resources to reduce risk.