Managing single echelon inventories through demand aggregation and the feasibility of a correlation matrix

This paper examines the assertion that partial pooling of customers is sometimes favored over complete pooling on the sole basis of demand correlation. First, the management of inventory within a supply chain is discussed, with specific attention paid to risk-pooling. Then, the claim that partial pooling can dominate is theoretically discussed. The conditions under which previous research found that partial aggregation could, at times, be preferable are investigated next. From this, methods are proposed for checking correlation matrices to ensure their validity. It is concluded that partial pooling can never do better and that examples supporting partial aggregation are based on inconsistent correlation matrices.