On the effects of risk pooling in supply chain management: Review and extensions

The primary challenge in supply chain management (SCM) is matching supply with uncertain demand. Risk pooling is an efficient and promising strategy to meet this challenge by reducing the underlying demand uncertainty through aggregation. The main focus of this thesis is to analyze the effects of risk pooling under different supply chain settings. There are two main contributions. First, we propose a mathematical framework which serves the multi-purpose of (1) unifying all existing models on risk pooling in the literature, (2) providing new facets and insights of understanding existing results on risk pooling, and (3) setting up new ground for extending existing models and results. Second, we investigate one interesting effect of risk pooling, namely, decreasing marginal return (or super-modularity). We show that there are decreasing marginal returns in risk pooling practices under certain conditions, specifically when the demand is independent and identically distributed (I.I.D.) and normally distributed.;The thesis is structured as follows. In Chapter 1, we introduce the concept of risk pooling and its effects in different areas especially in supply chain management, along with the aforementioned mathematical framework. In Chapter 2, we outline the risk pooling effect under newsvendor model. We review existing literature on risk pooling by adopting the framework developed in Chapter 1. Moreover, we review some counter examples in literature which address the "inventory anomaly" effect of risk pooling in newsvendor model. Chapter 3 deals with the decreasing marginal return effect in risk pooling under some conditions.