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LIU Fang, Nanyang Business School: Emergency Inventory Pooling

2012-12-19
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This paper studies the problem of how to cost-effectively manage pre-positioned stocks of key relief items for disaster preparedness among multiple suppliers. In order to respond effectively to a disaster, humanitarian and governmental organizations contract with suppliers, obliging them to maintain a minimum level of inventory at all times. We develop an analytical model to formalize this practice. If there is only one location, this inventory is essentially stockpiled and incurs holding costs. If there are multiple locations, however, we show that this emergency inventory can provide significant cost savings through a type of virtual pooling we call emergency inventory pooling. We identify a policy that optimally utilizes emergency inventory while meeting the system minimum requirement, and derive an algorithm that efficiently implements the policy. We conclude by examining for which suppliers and products emergency inventory pooling is most valuable.