In one of my previous blog posts on inventory, I used the info-graphic above to show the evolution of software to calculate safety stock. Since then, I have been asked the following question by several supply chain colleagues: How should one decide if their business needs Multi-Echelon Inventory Optimization (MEIO)? This is my attempt at answering that question.

The picture below depicts the production and distribution network for a company that makes and sells tomato ketchup. As you can see, the distribution starts at plants and finishes at retail stores via a network of warehouses. Also note the production side of the picture is showing a network. Each node in this network is a different step in the production process as specified by the bill of materials (BOM). To the extreme right are the customers like you and me, the important folks who fund this business by buying the ketchup. The arrow on the top shows the direction of the flow of material.

Tomato Ketchup distribution example for multi-echelon inventory optimization

Now imagine this business, except, there are thousands, if not tens of thousands, of products. The distribution network might have many more warehouses, the production network might have many more steps. If you can imagine all that, you are approaching a modern business that makes and sells many products across many different locations.

In such a network, one can hold inventory at any of the echelons (or layers).  A key question is: where should I hold the inventory? Should it be close to the customer? Should it be all the way back at the raw material level? Or should it be somewhere in the middle, like at the plant? If at the plant, should it be held at the bulk level, or should it be held at the packaged product level?

Traditionally, within the single echelon way of thinking, this question has been answered by the idea of postponement, which basically suggests that any product differentiation (packaging, finishing etc.) should be delayed (postponed) as much as possible to ensure the least amount of inventory. The idea was to get the inventory transformed at the last moment before shipping to the customer. This is indeed a great idea if you can do this and keep your customer happy via timely delivery of the product. However, today’s customer is not really willing to wait unless they are buying a very special product (Ketchup does not qualify). In this case, the customer expects on the shelf availability (or, in the case of B2B sales, in stock) at all times.

A holistic way of looking at this problem considers the give and take between these decisions while factoring in a lot of different data such as lead times, lot sizes, inventory costs, and the number of layers (echelons) available in the system. For example, holding the inventory upstream will increase the wait time for the customers.  If you hold it in all the echelons, you will most likely end up with too much inventory in the system. If you position it close to customer, you risk obsolescence.

If you have the type of complexity described above within your supply chain, you might need to look at Multi-Echelon Inventory Optimization. Assuming your business is make to stock, by which we mean that your customer expects material to be in stock when they order, you should ask the following questions.

  • Do you often have situations of too much or too little inventory at the same time?
  • Do you have more than 3 echelons in your network where you can hold inventories?
  • Do you have more than 1,000 stocked products and more than 3 stocking locations?
  • Are there limits in how much inventory can be held at each echelon?
  • Are there products or locations where no inventory can be held?
  • Do you have materials that go into many different parts of the network? (As intermediates, or within the distribution network)
  • Do you have a dollar target from management around how much inventory can be held by the business?

If you have answered yes to more than half the questions above, you should at least consider the MEIO technology.  It is a relatively new way of looking at inventory and has saved companies a bundle.Further detailed inquiry can establish whether the technology is a fit or not. For more information please take a moment to download our whitepaper on MEIO.

Have you had success with MEIO or other inventory optimization software? Let us know via comments.

Click on the link to see Arkieva’s infographic on MEIO.

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