Executive summary – Despite the increasing pressure to reduce working capital across many industries, many multinationals still optimize their inventory in the end-to-end supply chain in siloes. This leaves room for improving costs, customer service, and working capital. This article explains the concept of multi-echelon inventory optimization and how to successfully implement it in your organization, along with best practices and lessons learned from a real-life MEIO implementation in the CPG industry.
This article was published in the Journal of Business Forecasting | Volume 42 | Issue 4 | Winter 2023-2024.
Efficient inventory management is crucial for any business. While inventory is needed to meet customer service levels and mitigate uncertainties, organizations often struggle to balance customer service levels, inventory costs, and cash tied up in inventory. This challenge becomes even more complex when dealing with multi-echelon supply chains, where decisions are interrelated, and material availability downstream depends on material and resource availability upstream. A methodology that can be applied to tackle these challenges is termed Multi-Echelon Inventory Optimization (MEIO). In this article, we explore the concept of MEIO and its driving forces, its benefits, and how to successfully implement it in your organization to achieve higher levels of efficiency and profitability.
What is multi-echelon inventory optimization?
MEIO takes a holistic view of inventory management across multiple echelons (levels) within a supply chain. Traditionally, organizations have focused on optimizing inventories at each location, leading to suboptimal results and excess inventory in the system as a whole. Common reasons for excess inventory include lack of data visibility across the supply chain, lack of policy parameter revisions in organically-grown supply chains, and lack of expertise in right-sizing inventories in an integrated way.
MEIO takes a more integrated and comprehensive approach, optimizing inventory decisions across the entire supply chain rather than in siloes. Such a holistic view avoids inventory buffer duplication while ensuring high customer service levels. This is achieved by setting goals to meet the target service level of the end customer, modeling interactions between different echelons and locations, and accounting for various effects such as demand and lead time uncertainties.
What key forces drive the trade-offs in MEIO?
Curious to explore possibilities for MEIO in your organization? Reach out to one of our inventory experts today!