What Is Multi-Echelon Inventory Optimization?

Multi-Echelon Inventory Optimization: Why Traditional Inventory Strategies Fall Short

Like any other organism, your supply chain is a complex collection of systems that serve individual functions while contributing to the larger whole. Getting the most out of your operations means taking a holistic view that takes every aspect into account and considers the effect each element has on the entire system. This is why a growing number of businesses are turning to multi-echelon inventory optimization as a means of streamlining and optimizing their supply chains.

What is multi-echelon inventory optimization (MEIO), why is it critical for modern companies and how does it compare to traditional siloed strategies? The answers to these questions can be essential for achieving lasting positive results for your supply chain.

Understanding the Mechanics of Multi-Echelon Inventory Optimization

To fully understand how MEIO works, you have to begin by comparing it to the traditional methods of inventory optimization that businesses have been using for decades. Under the standard framework, companies optimize inventory levels independently at each phase of the supply chain. This means each warehouse, fulfillment center or distribution center is only fully aware of what inventory levels are for that specific location at any given time.

This siloed approach has the advantages of being simple to manage, but it also comes with some significant limitations that can cause problems within today’s multichannel commerce environment. Because each distribution level is treated as an independent entity, there’s no accounting for how much each one impacts the other. This can lead to situations in which the entire supply chain may be hit by shortages or overstock because the company failed to consider the condition of its inventory levels in total.

Where MEIO differs from the traditional outlook is in taking a holistic view of the supply chain. Rather than treating each level as a separate and isolated entity, MEIO steps back to take in the big picture. Supply chain managers make decisions about inventory levels based on how the stock level in one location could influence inventory at a different distribution level. This approach looks at every level of the supply chain — including suppliers, manufacturers, distributors and retailers — to make improvements and drive greater efficiencies.

A major component of any successful MEIO effort is data analytics. This is crucial for delivering the insights planners need to make their supply chains as efficient and effective as they can be. For example, an analysis of stock levels may reveal that a certain raw material is in higher demand at some levels than others. This gives supply chain managers the foresight to allocate safety stock upstream in a centralized location, ensuring sites projected to have a shortfall remain unaffected. Those locations will have a buffer in the event their supply levels for that raw material slip below the predetermined threshold.

Benefits of Implementing Multi-Echelon Inventory Optimization

A growing number of companies are integrating MEIO into their operations and realizing a wide range of benefits as a result. Among the many advantages of multi-echelon planning are:

·      Lower Costs — Under the traditional approach, companies often maintained high levels of safety stock for certain items. This gave them a buffer in the event of unexpected volatility in the market or disruptions in the supply chain. But because this excess inventory may or may not be needed, it can lead to added costs and inefficiencies. A multi-echelon inventory optimization approach reduces the need for this safety stock by empowering managers to make decisions based on real-time data and analytics for the entire supply chain.

·      Greater Efficiency — Maintaining optimized inventory levels throughout every point on your supply chain also helps you drive more efficiency into your operations. MEIO can help you cut down on your cycle times and reduce the amount of waste your activities produce. When you have a big-picture approach to your inventory across all levels, you’ll be able to streamline and get things done faster and with less bloat.

·      More Accuracy — One of the key elements of MEIO is real-time data from every point along your supply chain. This is critical if you want to be able to make decisions as quickly and accurately as possible. Advanced data analytics tools mean there is less guesswork involved in supply chain planning, as well. The higher degree of certainty this provides means your choices will be more likely to be correct, meaning you won’t spend nearly as much time putting out fires or scrambling to pivot away from a failed strategy.

·      Better Customer Service — The happier your customers are, the more successful you’ll become. MEIO gives you the power to enhance the level of service you provide your customer base through more-accurate forecasting. With MEIO, you’ll be in a better position to plan for fluctuations and prepare for sudden changes. That means your customers will spend less time wondering where their orders are and experience more satisfaction overall.

Challenges and Solutions in Multi-Echelon Inventory Optimization

Although implementing MEIO into your operations can result in some significant benefits, that’s not to say the process will be a walk in the park. If you want to make sure your MEIO project goes as smoothly as possible, you’ll need to be on the lookout for some common stumbling blocks such as:

·      Resistance from Staff — Any new process is bound to be met with skepticism at first, especially one as transformative as MEIO. At first, your staff may be wary of big shifts in inventory placement as they will likely feel counter-intuitive. However, you can ease these concerns with a well-planned education and training initiative that spells out exactly how the new system works and what advantages it will bring.

·      Data Quality — For MEIO to work properly, it needs to start with clean and accurate data. Unfortunately, traditional siloed systems often create redundancies and discrepancies that will need to be addressed before migrating to the new way of planning. This is why it’s critical that any plan for implementing multi-echelon inventory optimization should begin with a comprehensive assessment of your enterprise’s supply chain data. This will ensure that all your historical information is properly formatted, free from errors and ready to be fed into your new platform.

·      Heightened Complexity — Moving from a single-echelon strategy to a multi-echelon approach means utilizing advanced data analysis and modeling. The added complexity this introduces into supply chain management can be daunting for many companies and can lead to efforts collapsing into confusion. This is where having a robust platform for supply chain management that is easy to use and as intuitive as possible can help businesses overcome this hurdle.

Taking the Next Steps into the World of MEIO

As technology continues to take big steps forward, multi-echelon inventory optimization is poised to become even more prominent in the world of supply chain management. Two of the biggest developments of late are the emergence of next-generation artificial intelligence and machine learning algorithms. These have the potential to boost the analytical capabilities of companies that use MEIO to a substantial degree, helping them leverage the information they collect in the most effective manner.

As you examine everything MEIO can do for your business, it’s important to note that implementing it is more than a plug-and-play experience. It’s an ongoing process that involves the right level of engagement and the right tools to gain the most benefit. This is why so many choose ketteQ’s powerful supply chain software solution for their businesses. Our cloud-based analytics and automated processes for inventory planning, service parts planning, and more give companies the capabilities and support they need to optimize their multi-echelon inventory placement and achieve the highest levels of performance across all levels.

If you want to learn more about ketteQ’s solution and everything it’s capable of doing for your business, take the next step and get in touch with us today to schedule a demo.