Multi-echelon inventory optimization guarantees great savings

Michiel Jansen   |   July 14, 2016   |  

A major EyeOn innovation that increases business value for our customers, is multi-echelon inventory optimization (MEIO). MEIO is guaranteed to bring great savings in inventory to companies that currently only optimize on inventory for each warehouse individually. At the same time, only very few companies truly use MEIO for optimizing inventories. There are several reasons for this.

First and most important, MEIO requires a different way of thinking and sufficient trust. MEIO means looking at inventories in the supply chain from a holistic perspective. It requires thinking from the final customer point of view. Often, MEIO means that inventories are kept close to the customer. Regional warehouses only keep small amounts of stock and local warehouses accept a degree of uncertainty in their replenishments. In turn local warehouses keep somewhat higher stocks to mitigate this uncertainty. This may make both financial controllers and sales managers anxious. Sales managers are disturbed by unreliable supplies into their region and financial controllers are disturbed by higher inventories than they are used to in the local warehouses. If looked at from a supply chain perspective however, it makes perfect sense. MEIO simply balances inventories across the supply chain in an optimal manner, minimizing total inventory while at the same time guaranteeing a stable high customer service. 

Secondly, MEIO requires specialist modelling of the supply chain. Stocking points, transportation routes and finite capacity resources have to be modelled to the level of detail that they impact stock and service levels. Strong business and supply chain knowledge is required to decide what elements of the supply chain need to be modelled. Strong analytical skills are necessary to tap into the relevant data sources, to collect and process the data, and to create an exact model of the supply chain.

Thirdly, MEIO requires advanced tooling which is currently lacking. Real supply chains have finite capacity resources, uncertain production yields, non-perfect demand forecasts, uncertain replenishment lead times, and so on... All these factors have a significant impact on true service levels. Moreover, the dependencies between upstream and downstream warehouses are not easily captured in formulas. Rules of thumb and simple safety stock formulas alone are not sufficient here. Some commercial software vendors claim to deal with all these factors. However, due to the lack of transparency and the fact that the results from this software cannot be validated, acceptance by planners and supply chain managers is still fairly limited.

Supply chain simulation is an alternative to black box MEIO tools that is both transparent and can be validated. However, whereas supply chain simulation provides a way of reliably estimating service levels for a given supply chain scenario, it doesn’t tell you what the optimal stock levels are. At EyeOn, we have been working to combine simulation techniques with state-of-the-art optimization. The solver we developed is able to optimize a supply chain simulation model which guarantees accurate projection of service levels. This innovation opens the door to multi-echelon inventory management for any company.

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Michiel Jansen

Michiel Jansen

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