Supply Chain Transformation with Multi-Echelon Inventory Optimization

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Effective inventory management is key in any industry.  Making sure you have optimal stock levels is critical to meeting consumer demand, generating revenue, and realizing financial success.  In the current turbulent economic environment from the global pandemic, it is even more crucial to have a strong inventory strategy to mitigate risk and maintain optimal stock levels.  As organizations grow, their echelons begin to multiply, creating more complex supply chains with additional management nodes to coordinate and optimize.  If each node is an isolated event, organizations miss strategic insight and ultimately lose potential value and savings.  To maintain a functional supply chain, organizations need to effectively manage their inventory across multiple echelons of their supply chain.

The challenge to optimizing inventory levels is forecasting enough stock levels at each echelon while preventing costly overstocks.  If forecasted too high, organizations have excess stock that will not move quickly enough, reducing your working capital.  If forecasted too low, organizations miss possible sales with customers due to stockouts, reducing profits and potentially hurting relationships with customers who may be disappointed that a product is out of stock.  The solution for multi-echelon inventory optimization (MEIO) is a strategic, predictive approach to supply planning that enables organizations to anticipate stock levels across their different distribution and warehouse locations.

What is Multi-Echelon Inventory Optimization?

The goal of multi-echelon inventory optimization is to have the right amount of stock at the right location and at the right time.  To better understand multi-echelon inventory optimization, we must first look at single-inventory optimization.  Single-inventory optimization is a type of supply planning in which supply at each location is optimized independently.  This approach works for smaller companies composed of less complicated supply chain networks with fewer distribution points.  In larger organizations, the problem with using a single-echelon inventory optimization model to manage inventory is that in treating each distribution level independently, you fail to recognize the impact that one level has on another.  For instance, if you were to apply demand or replenishment strategies to different echelons of distribution independently, stock level changes at one distribution center reduce stock availability across the entire supply chain.

Multi-echelon inventory optimization (MEIO) offers a solution to enable organizations to optimize inventory levels throughout their distribution networks.  With MEIO, organizations strategically manage their inventory from a comprehensive perspective and successfully optimize inventory throughout their supply chain.  By analyzing ideal inventory movement across each echelon, organizations prevent timely supply chain delays when downstream distribution centers have the product on-shelf, but upstream warehouses are out-of-stock.  Organizations integrating this method of supply chain planning into their inventory optimization have enjoyed many benefits as a result.

The Benefits of Multi-Echelon Inventory Optimization

Boost Cost Efficiency

Without a clear inventory optimization strategy, organizations may choose to maintain more stock throughout their supply chain, so they are prepared to meet spikes in consumer demand with enough stock ready at any distribution center.  Unfortunately, this approach is neither economical nor profitable since it leads to inventory excess with too much capital tied up in stock that does not move quickly enough.  Multi-echelon inventory optimization helps an organization make better use of its capital, investing in optimal stock levels that move more fluidly through the supply chain.

Decrease Stockout

Without successfully optimizing inventory levels, organizations may end up forecasting too low, resulting in inventory stockouts.  When organizations use multi-echelon inventory optimization, they can successfully predict stock levels throughout their supply network, enabling them to meet consumer needs.

Better Management of Supply or Market Volatility

Suppose organizations fail to optimize their inventory levels. In that case, they may not be prepared for sudden changes in market demand or supply, such as what was seen last March toward the beginning of the global pandemic.  With multi-echelon inventory optimization, organizations achieve optimal levels of stock throughout their supply chain.  Having enough stock at any point throughout their distribution networks boosts agility, allowing them to quickly and strategically respond to market and supply volatility.

Improve Lead Times

Without a strategic approach to inventory optimization, organizations handicap their ability to manage fluctuating lead times.  Sudden changes in lead times arise since suppliers’ estimated lead times may not always be accurate, leading to shortages, excess stock, etc.  Multi-echelon inventory optimization helps organizations maintain enough stock levels throughout the supply chain network, allowing them to adapt and respond to lead changes quickly as they arise.

Better Return on Investments

Without a successful inventory optimization strategy in place, organizations may invest too much capital in stock that is not moving fast enough through their supply chain.  Multi-echelon inventory optimization allows organizations to manage optimal inventory levels — so without too little or too much inventory, they can successfully meet consumer demand.  This means better profits and better returns on investments.

Conclusion

Multi-echelon inventory optimization is an area of operations organizations have long struggled with, trying to achieve the best strategy to manage their supply chain.  Ineffective inventory management can be problematic and costly for organizations. Implementing a robust inventory management method, such as Vanguard Predictive Planning™, is critical for organizations to successfully manage the flow of goods and services throughout their supply chain.  Vanguard’s multi-echelon inventory optimization (MEIO) solution balances inventories across the entire distribution network, considering the interdependencies between echelons.  Organizations that go beyond single-echelon inventory optimization offer highly competitive service levels and see a reduction in – or elimination of – stockouts.