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Inventory Pooling: Everything You Need to Know in 2024

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In this article, we explore what inventory pooling is and its benefits. We also cover its challenges and share our simple 5-step process for implementing pooled inventory. Read on to learn more.

inventory pooling
Source: cashflowinventory.com

What is Inventory Pooling?

Inventory pooling refers to the practice of combining the stock of a particular item from multiple locations or sources into a single, centralized pool to serve multiple points of distribution. This strategy is particularly popular in retail, manufacturing, and supply chain management to optimize inventory levels and reduce costs.

Example: Imagine a fashion retailer with stores in New York, London, and Paris. Instead of each store holding its own separate stock of a popular shoe model, the retailer keeps a centralized stockpile and distributes the shoes to each store based on demand, ensuring efficient use of inventory and reduced storage costs.

pooled inventory

Benefits of Inventory Pooling

Inventory pooling offers a myriad of benefits to streamline operations and enhance financial outcomes for businesses. Let’s explore some of these below: 

Reduced Holding Costs: 

By centralizing inventory, businesses can often operate with lower overall stock levels which leads to reduced warehousing costs and minimized capital tied up in unsold stock.

Enhanced Service Levels: 

With a pooled inventory, stock-outs at one location can be addressed by reallocating stock from other locations to ensure that demand is met promptly.

Reduced Stockouts and Excess Inventory: 

Centralized visibility into inventory levels allows for better forecasting and distribution to reduce both stockouts and overstock situations.

Economies of Scale: 

Centralizing the procurement and storage of inventory can lead to bulk purchase discounts and more efficient utilization of storage space.

Flexibility: 

Inventory pooling provides flexibility in managing stock to enable businesses to rapidly adapt to changing market conditions or unforeseen demand spikes.

Challenges of inventory pooling

Challenges of Inventory Pooling

While inventory pooling presents numerous benefits, it also comes with its own set of challenges that businesses must navigate. Some of them include: 

Complexity in Management: 

Managing a centralized inventory system requires sophisticated inventory management software and practices, as it's essential to track stock levels, demand, and distribution across multiple locations.

Logistical Challenges: 

Centralized inventory might lead to longer lead times for certain locations, as goods need to be transported from the central pool to the end distribution point.

Demand Forecasting: 

A pooled inventory system is only as good as the demand forecast. Inaccurate predictions can lead to stockouts or excess stock which negates some of the benefits of pooling.

Initial Setup Costs: 

Transitioning to an inventory pooling system might require investments in technology, infrastructure, and training.

Change Management: 

Employees accustomed to a decentralized inventory system may resist the change to a pooled system which necessitates training and change management initiatives.

Steps to Implement Inventory Pooling

5 Steps to Implement Inventory Pooling

Use our 5-step inventory pooling implementation process to effectively manage your inventory. Simply follow the steps below:

1. Conduct a Feasibility Study: 

Before making any changes, businesses should assess their current inventory practices, demand patterns, and logistical capabilities to determine if pooling is the right strategy.

Example: For instance, a company specializing in handmade crafts realizes that its storage facilities across three states are inconsistently stocked. By conducting a feasibility study, they determine that centralizing their inventory could lead to more balanced stock levels and reduced wastage.

2. Invest in Technology: 

An effective inventory pooling system requires robust inventory management software that offers visibility across all locations, facilitates real-time tracking, and supports data-driven decision-making.

Example: Imagine a regional supermarket chain using disparate systems to track products in different branches. By investing in a unified inventory management system, they can gain a holistic view of stock levels across all stores that ensures timely restocking and reducing instances of overstock.

3. Centralize Procurement and Distribution: 

Restructure procurement processes to buy for the centralized pool and set up efficient distribution systems to ensure timely delivery from the pool to end points.

Example: Consider a cosmetics brand with suppliers worldwide and numerous outlets nationally. Instead of each outlet making separate orders from global suppliers, centralizing procurement ensures bulk orders, better negotiations, and a more systematic distribution that leads to stores receiving products just in time for demand spikes.

4. Train Staff: 

Ensure that all staff, from warehouse workers to management, understand the new system and its benefits. This might include formal training sessions, workshops, or on-the-job training.

Example: A shoe manufacturer decides to transition to inventory pooling and realizes that the warehouse teams are not familiar with the new system. They organize a series of workshops and hands-on training sessions to ensure every employee, from stock pickers to managers, is equipped with the knowledge to utilize the new system effectively.

5. Regularly Review and Adjust: 

Implement regular review mechanisms to monitor the performance of the inventory pooling system. Analyze data to identify areas for improvement, adjust procurement strategies, and refine distribution logistics as needed.

Example: A tech gadget wholesaler employing inventory pooling observes a pattern of overstocking a particular item in one quarter. Through monthly performance reviews and data analytics, they identify the trend, adjust their procurement strategy, and reallocate resources to match the changing demand to avoid unnecessary storage costs in the subsequent quarters.

Example

BellaCafe is an upscale chain of coffee shops with outlets spread across the East Coast. Their specialty is sourcing unique coffee beans from various countries, roasting them in-house, and providing customers with fresh, rich flavors. However, managing inventory for each outlet was becoming increasingly challenging. Here's how they employed our inventory pooling process:

1. Conduct a Feasibility Study: 

BellaCafe noticed discrepancies in stock levels across outlets and occasional stockouts of popular beans, and initiated an in-depth study. The analysis revealed that while some outlets had an excess of certain beans, others were running short which led to missed sales opportunities.

2. Invest in Technology: 

To address this, BellaCafe invested in "BeanTrack", a sophisticated inventory management software tailored for coffee chains. This platform allowed real-time tracking of bean stock levels across all outlets, centralized ordering, and predictive analysis based on sales data.

3. Centralize Procurement and Distribution: 

Instead of each outlet directly sourcing beans, BellaCafe set up a central procurement hub. All beans were now first sent to this hub, which then efficiently distributed them to outlets based on demand. This not only ensured economies of scale in bean procurement but also standardized the quality of roasting.

4. Train Staff: 

Recognizing the drastic change from the previous decentralized system, BellaCafe organized a "BeanTrack Bootcamp". This intensive training program educated all staff, from baristas to branch managers, on the nuances of the new inventory system to ensure a smooth transition.

5. Regularly Review and Adjust: 

Three months into the implementation, BellaCafe convened a review meeting. By analyzing data from "BeanTrack", they observed the overstocking of a particular bean due to a temporary trend. The company then adjusted its procurement and distribution strategies to ensure optimal stock levels moving forward.

BellaCafe now boasts increased sales, reduced wastage, and a reputation for always having customers' favorite beans in stock. Inventory pooling turned out to be the game-changer they needed.

We hope you now have a better understanding of what inventory pooling is and the process of implementing it to optimize your inventory management.

If you enjoyed this article, you might also like our article on what inventory waste is or our article on lean inventory.

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