Multi echelon inventory optimization
Multi-echelon inventory optimization (MEIO) models inventory levels across multiple stages of the supply chain. Traditional models plan inventory independently at each stage and can lead to excess inventory build up. MEIO considers the impacts that inventory levels at each stage have on upstream and downstream stages to minimize total inventory while meeting customer service goals. Failing to use MEIO can result in redundant safety stock, customer service failures even when inventory exists elsewhere in the supply chain, and unreliable demand projections provided to suppliers. MEIO determines optimal inventory levels for each stock keeping unit based on factors like demand, lead time variability, replenishment frequency, and desired service level.
Multi echelon inventory optimization
- 1. Multi-echelon Inventory Optimization Based on the paper by Calvin Lee, already circulated to you Chat session-01/12/2012
- 2. Echelon – what it is? • An echelon is a level or some height. In inventory it is synonymous with the various levels at which inventory is held, viz., Factory warehouse, Distributor’s warehouse, and at retailer level. • If Inventory is planned at each level – echelon – independent, it can lead to very high inventory build-up. This is the way distribution inventory is possibility built-up. • The problem has also a lot of importance in modern “Supply Chain Management”. • It is proved that that the costs can be minimized for the chain as a whole, rather than adding up the minimum inventory costs at each locations or echelons, based on EOQs.
- 3. What’s MEI? • Traditional inventory models often use normal distributions, only forecast accuracy, single location, and don’t consider up- and down-stream SKU-L’s. • Multi-Echelon Inventory optimization moves beyond traditional assumptions for demand behaviour and demand variability. • It considers impact of upstream and downstream inventory to delivering customer service. • Models can be built to deliver the best possible service levels – at minimum inventory holding – for each SKU.
- 4. Problems in not following MEIO • The network carries excess inventory in the form of redundant safety stock. • End-customer service failures occur even when adequate inventory exists in the network • External (outsourcing) suppliers deliver unreliable performance, because they have received unsatisfactory demand projections. • Internal allocation decisions can be erroneous.
- 5. Inventory Drivers for a SKU located at a DC • Demand: Rate of product flow out of the DC • Demand Variation: Fluctuation of the product outflow from period to period • Lead Time: Expected time delay between ordering and having new product available to fulfill demand • LT Variation: Fluctuation of the lead time from order to order • Replenishment Review Frequency: Frequency with which the DC checks its inventory position to see if a new order is needed • Order Supply Strategy: The DC’s time supply objective, which depends on the economic trade-offs between carrying inventory, handling, transportation and purchase cost • Service Level Goal: The DC’s service commitment to end customers • Inventory Position: The DC’s available stock, taking into account the on-hand inventory, on-order quantities, back orders and committed stock