Pooling in Business

Why is pooling important? Because it reduces average waiting time of each thing and idle time of each stage. Furthermore, it reduces fluctuations associated with both of these two variables.

In manufacturing, a workflow can be defined as a process during which things (products, parts, or people) pass through one or a series of stages at some speed, during which some work is performed during an amount of time.

Pooling (or un-pooling) occurs when objects are grouped (ungrouped) and/or steps are divided (combined) so that sub workflows are created (merged) from (into) the main workflow.

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We have seen pooling being applied in traditional business operations. The most evident example is waiting lines: instead of having n queues in front of n windows, it is more efficient to have one long queue. (You can read up on the maths here). You can see this being applied at major airports during immigration procedures.

Why is pooling important? Because it reduces average waiting time of each thing and idle time of each stage. Furthermore, it reduces fluctuations associated with both of these two variables. If you enter one among n waiting lines at random, your actual waiting time may fluctuate greatly. Having one combined waiting line brings down this level of fluctuation.

We are all familiar with fluctuations. One popular buzzword concerning fluctuation, particularly in finance, is downside risk, i.e. the possibility that actual return falls belowexpected return for a given asset. In business however, managers must worry not only about downside risk but also upside risks. Why?

Because when there is upside risk, there is a chance that capacity will be idle. Idle capacity means that resources were committed inefficiently to a particular procedure and could have been allocated elsewhere. And in business, resources are equivalent to costs, which is equivalent to foregone profits.

Pooling is also extremely important when it comes to strategy innovation.

One way to look at how various businesses can compete within each other within an industry is the following framework.

By taking advantage of the pooling effect, businesses can bend the rules / parameters of the game and gain an edge on industry incumbents. Many recent disruptions that are making the news have applied this principle to great success.

One example is Uber / Grab Taxi. By opening up personal cars (a stage) as a transportation means for non-car owners (a thing), Uber manages to lower waiting / idling time for both passengers and drivers, thereby reducing costs.

If you take into account company cars, which are sitting idle in office building parking lots most of the time, you can see that Uber still has tremendous room for growth by just applying the pooling technique.

 Other businesses that have made use of the pooling technique:
– AirBnB (opening up personal homes for vacationers to stay during short term)
– LiveOps (training housewives to be call-center agents during their spare time at home)
– FoodPanda (does not open up new workflows but aggregate eaters and eateries into one massive workflow, thereby reducing waiting / idling time for both parties).

As such, you can see the huge potential benefits pooling can have on many industries, both nascent and mature. Pooling helps a big question that small businesses have today: “How do I dethrone the big guys?” As economy of scale and product standardization eats away the margins available for play in the traditional sphere, pooling provides one creative way in which non-industry-leaders can overcome the challenges posed by the small size of their operations.

Duc Pham, CFA