In‐Class Simulation of Pooling Safety Stock

In managing business process flows, safety stock can be used to protect against stockouts due to demand variability. When more than one location is involved, the concept of aggregation enables the pooling of demands and associated inventories, resulting in improved service levels without increasing the total level of safety stock. This pooling of safety stock can be done physically by consolidating inventory in one location, or by using virtual centralization, where inventories are kept at decentralized locations, but information is centralized. In teaching the concept of pooling safety stock, a simple in‐class simulation can be helpful in demonstrating why the approach works. The approach presented here involves operations for a company where total product demand is constant, but there are two products and product mix can vary. The simulation can also be implemented using an electronic spreadsheet for classes that are taught on the Internet. A quiz was given to two sections, one that experienced the simulation and one that did not. A comparison of the results from the quiz provided evidence of the effectiveness of the simulation in helping students understand the impact of pooling safety stock. In addition, a brief anonymous survey that was administered in the section that had the simulation provided further support for the effectiveness of the simulation.