Efficient inventory management is crucial for any business, especially in uncertain times. 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.
The state-of-the-art powerful solution successfully tackling these challenges is termed Multi-Echelon Inventory Optimization (MEIO). In this blog post, we will 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.
Understanding 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 to right-size the inventories in an integrated way.
MEIO takes a more integrated and comprehensive approach, optimizing inventory decisions across the entire supply chain network rather than in siloes. Such a holistic view avoids inventory buffer duplication while ensuring product availability. This is achieved by setting the goal to meet the target service level of the end customer, modelling interactions between different echelons and locations, and accounting for various effects such as demand and lead time uncertainties.
Multi-echelon inventory optimization offers significant benefits to your business. It helps increase customer service levels and optimize or rebalance inventory across the entire supply chain, reducing holding costs and efficient use of resources. Your business can free up working capital and reduce carrying costs by eliminating excess inventory.
The benefits of MEIO, however, go beyond merely adjusting stock to match service: it increases the overall supply chain operational efficiency and responsiveness by streamlining inventory-related processes; finally, MEIO provides valuable insights into supply chain dynamics and helps to identify areas for improvement, which leads to better planning also on the strategic level. It is not uncommon to see an MEIO project triggering discussions on strategic topics such as customer service offerings (service level differentiation) or network redesign.
The four key forces of MEIO
When it concerns the positioning of safety stocks across a multi-echelon supply chain, a significant trade-off is holding safety stock buffers upstream vs. downstream (close to the end customer). We observe four primary effects which impact the positioning in opposite directions. The first (last) two increase the tendency to hold safety stock upstream (downstream):
- Demand pooling effect: centralizing safety stocks upstream to mitigate uncertainties for multiple products or at multiple locations with the same safety stock.
- Value effect: inventory carrying costs usually are lower upstream.
- Lead time pooling effect: consolidation of safety stock at a downstream location that also covers for lead time and variability of its upstream location(s)
- Service level effect: downstream buffering is preferred if service levels are differentiated.
Read our related blog: How ‘reinforcement learning’ can solve your inventory challenges
The EyeOn unique approach to MEIO: from black box to glass box
At EyeOn, we have developed a powerful and unique approach for MEIO, combining cutting-edge analytical techniques with extensive business know-how. We help our customers right-size their inventory levels rather than reducing them. This is why we start every project by identifying the business question of our customers, which leads to defining the right objective for the study.
After the data collection and validation phases, we perform a quick win analysis to derive actionable insights, harvest ‘low-hanging fruit,’ and set the baseline for our MEIO model. Our simulation-based optimization framework enables us to tackle real-world complexity, such as total container shipments, limited capacity, minimum order quantities, etc.
We build and validate the model together with the customer during multiple touchpoints, thereby building trust in it. We gradually increase the modeling complexity and build the planners’ understanding of the safety stock drivers and the root causes for the gaps between the current and optimal performance. The stock optimization phase is followed by a scenario analysis phase, where we test different scenarios to provide decision support.
Finally, we facilitate implementation by segmenting the customer’s portfolio through a simple decision tree based on SKU characteristics, which reduces the burden of individually assessing each SKU and eases policy parameter settings for new SKUs.
After a successful project, we sustain our solution by means of such a decision tree or by offering a recurring periodical service for keeping the safety stock parameters up to date.
MEIO is a powerful tool for businesses looking to right-size their inventory across multiple echelons within the supply chain and go beyond basic textbook modeling and silo-thinking. By taking a holistic approach and leveraging data-driven insights, organizations can balance customer service, inventory costs, and cash. With EyeOn MEIO, you can optimize your safety stock levels in a one-off exercise, sustain the solution for a long time, increase your planners’ understanding of the supply chain dynamics, and take ultimate control of your stock value.
Curious to explore possibilities for MEIO in your organization? Reach out to one of our inventory experts today!