It’s frustrating for customers to be told that a coveted mobile phone is out of stock, or worse, be bumped off an overbooked flight. Disgruntled consumers could turn to rival products or hurt the business’s reputation with negative reviews. But holding excess stock to avoid disappointing customers isn’t a solution because it also incurs costs in the form of storage, spoilage, or working capital requirements.

Companies have long tried to mitigate the cost-service trade-off through risk pooling. The practice comes in various guises, including merging inventories of different stores in a single location, code-sharing (for airlines), and lateral transshipments, which essentially entails moving goods from a well-stocked location to another that is struggling to meet demand.

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