In any business, effective inventory management is everything. Making sure you have optimal levels of stock is critical to being able to meet consumer demand, generate healthy revenues and ultimately realize financial success. And, in an increasingly turbulent economic environment, it is even more crucial to have a strong strategy in place to help mitigate risk and maintain optimal levels of inventory. In procurement, if each function is treated as an isolated event, disconnected from each other and the bigger picture, companies miss out on strategic insight and ultimately lose out on potential value and savings. The same is true for inventory management. To maintain a functional supply chain, companies need to effectively manage their inventory across multiple echelons of their supply chain.
The challenge to optimizing inventory levels is in forecasting enough levels of stock across your entire supply chain network. If you forecast too high, you end up having excess stock that won’t move quickly enough, also reducing your working capital. If you forecast too low, you will miss out on possible sales with customers, reducing profits, and could potentially hurt relationships with customers who may be disappointed that a certain product is out of stock. So, the question is: Is there a magic formula that can help companies achieve the optimal balance of inventory — in order to hit that “sweet spot,” between too low and too high levels of stock? The solution is not so much a formula as it is a strategic approach of supply planning that helps companies prepare optimal levels of stock across their different distribution locations.
What Is Multi-Echelon Inventory Optimization?
The goal of inventory optimization is to have the right amount of stock at the right location at the right time, in order to successfully meet supply with demand at all levels of the supply chain. To understand multi-echelon inventory optimization, we must first look at single-inventory optimization. Single-inventory optimization is a type of supply planning in which supply at each location is optimized independently of each other. This type of approach works for smaller companies that are composed of less complex supply chain networks with fewer points of distribution from the point-of-origin to the end-point, the consumer. In larger companies, the problem with using a single-echelon inventory optimization model to manage inventory is that in treating each distribution level independently of one another, you fail to recognize the impact that one level has on another. For instance, if you were to apply demand or replenishment strategies to different echelons of distribution, independently of each other, changes of stock levels at one distribution point could reduce availability of stock across the entire supply chain.
Multi-echelon inventory optimization offers a solution to help companies optimize inventory levels throughout their distribution networks. This type of supply chain planning successfully combines inventory optimization (how much stock to keep at each distribution level) with multi-echelon planning (deciding where to keep inventory at each distribution level). In multi-echelon inventory optimization, companies can strategically manage their inventory across all echelons of their supply chain. It treats inventory optimization from a comprehensive or globalized perspective, helping successfully optimize inventory throughout the supply chain. This helps mitigate such issues as being able to optimize levels of stock at your upstream distribution points, while failing to meet the needs of downstream locations or vice versa. Enterprises that have been integrating this method of supply chain planning into their inventory optimization have enjoyed many benefits as a result.
So, What Are the Benefits of Multi-Echelon Inventory Optimization?
1) Boost in Cost-Efficiency
Without a strong inventory optimization strategy, companies may try to just keep more stock throughout their supply chain, so they are prepared to meet consumer demand with enough stock ready at any one distribution point. Sounds good, right? Well, unfortunately this approach is uneconomical, as well as unprofitable because it can lead to inventory excess, with too much capital tied up in stock that won’t move quickly enough. Multi-echelon inventory optimization helps companies make better use of their capital, investing in optimal levels of stock that will move more fluidly throughout the supply chain.
2) Improvement in Customer Service
Without successfully optimizing their inventory levels, enterprises may end up forecasting too low, resulting in inventory deficits. This means that they could potentially be out of a certain product a customer wants or needs by the time inventory has moved downstream to the consumer. And, of course, this would hurt their customer service levels as they are not sufficiently meeting consumer demand. When companies utilize multi-echelon inventory optimization, they can successfully forecast enough levels of stock throughout their supply network — meeting consumer needs and keeping customers happy.
3) Better Management of Supply or Market Volatility
If companies fail to optimize their inventory levels, they may not be prepared for sudden changes in market demand or supply. With multi-echelon inventory optimization, companies achieve more optimal levels of stock throughout their supply chain. Having enough stock at any point throughout their distribution networks boosts an enterprise’s agility, helping them more quickly and strategically respond to market and supply volatility.
4) Better Management of Lead Times
Without a strategic approach to inventory optimization, enterprises handicap their ability to manage fluctuating lead times. Since suppliers’ estimates of lead times are not always accurate, sudden changes in lead times can arise, leading to stock shortages, excess stocks, etc. Multi-echelon inventory optimization helps companies maintain enough levels of stock throughout the supply chain network, so they can quickly adapt and respond to lead changes as they come up.
5) Improved Return on Investment
Without a successful inventory optimization strategy in place, enterprises may invest too much capital in stock that is not moving fast enough through their supply chain. Multi-echelon inventory optimization allows companies to manage more optimal levels of inventory — so without too little or too much inventory, they can successfully meet consumer demand. This means better profits, and better returns on investments.
Inventory optimization is a major area of operations that companies have long grappled with, trying to achieve the best strategy to manage their supply chain. Ineffective inventory management can be problematic for enterprises, and consequently, costly as well. Implementing a strong inventory management method such as multi-echelon inventory optimization could be game-changing for enterprises, helping them successfully manage the flow of goods and services throughout their supply chain — leading to tremendous financial gains.