Advantages of Multi-Echelon Inventory Optimization

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Businesses find managing inventory a tough balancing act in times of market volatility. It is more complicated in the case of larger businesses that have thousands of products at different locations worldwide. In general, they use either a single-echelon/single-tier system or a multi-echelon/multi-tier system to handle inventory.

About inventory optimization

Following are the two methods of inventory optimization:

  • Single-echelon inventory optimization (IO): A single distribution center (DC) acts as a central repository for businesses and their customer-facing outlets. IO optimizes the inventory at a single location or DC, without being affected by other locations or echelons. Businesses that implement IO usually have full control of their DCs and distribute their products from there.
  • Multi-echelon inventory optimization (MEIO): MEIO optimizes stock across all locations in a supply chain network. New inventory shipments are first stored at a central or regional distribution center (RDC). These central facilities function as the internal suppliers to the customer-facing outlets.

Both IO and MEIO optimize inventory levels to match demand. They streamline operations, keep inventory levels low, and free up working capital. They also enable businesses to move inventory easily and maintain customer service levels. However, MEIO has a few advantages over IO.

Advantages of MEIO over IO

There are several reasons why you may want to use MEIO rather than IO:

  • More complex operations: IO usually optimizes the inventory and customer service level at one DC. However, MEIO helps manufacturers and multi-step distributors to ensure correct levels of all inventory types across various echelons in the network. It balances the complex relationships between stages and variables that cause excess inventory, such as long lead times and volatility in demand and supply.
  • Holistic approach: MEIO sees the entire supply chain and manages the inventory as a whole, rather than as stock at independent locations. It has a holistic approach to inventory management. It considers the entire inventory investment, along with the demand forecast at the customer-facing echelon and constraints in order and logistics. Demand forecasting and inventory planning are centralized decisions, rather than a series of individual choices for each echelon.
  • Optimal inventory: MEIO offers an optimal mix of different inventory types–raw materials, parts, finished goods. It alerts businesses as to when and how much of each type is needed at which location to match demand requirements and service customers. IO cannot handle such complexity.
  • Improved visibility: Businesses with MEIO have better visibility up and down the demand chain. Each echelon is aware of the other echelons’ inventory levels and can respond accordingly.
  • Synchronized orders: MEIO matches the ordering cycles at the DCs with RDC operations. This reduces lead times and variation in lead time between the RDC and the DCs.
  • Better customer service levels: MEIO helps businesses have control over how and when a product enters and leaves the RDC. This, in turn, helps the RDC to offer different service levels for the same product to different DCs.
  • Insight into challenges: When implemented well, MEIO provides valuable insight into the challenges in the supply chain, including manufacturing, distribution centers, suppliers, and products in transit. It addresses the issues at each level, including variability in demand and supply.
  • Comprehensive growth: MEIO helps reduce expenses by optimizing inventory and customer service levels. This allows businesses to spend money on other worthwhile operations, which leads to overall growth.

Most people prefer to order online these days. Their expectations for services, such as same-day delivery, are growing. There is stiff competition among businesses to meet their expectations. Only businesses that maintain warehouses and stores at multiple locations and manage them well will be able to succeed. They can do so by implementing MEIO using advanced custom-made solutions.