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What Is a Multi-Echelon Inventory System?

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What Is a Multi-Echelon Inventory System

Supply chain management is a cornerstone of every business. Even if a business doesn’t handle physical goods, they still rely on a well-functioning supply chain.

By now, we’ve all experienced the impact of interruptions in the global supply chain. Some of the interruptions are outside of everyone’s control, but other times interruptions can be avoided or minimized with good inventory management. The primary goal of inventory management and supply chain management is to always have the right materials and products in the right place, at the right time. As you might imagine, that can be a complicated task.

There are different methods and strategies to help businesses maintain their inventory and fulfill orders in the most efficient way possible.

One inventory management strategy is called multi-echelon inventory management (MEIO). This article will explain what MEIO is and how it benefits companies.

Multi-Echelon Inventory Optimization (MEIO)

Multi-echelon inventory optimization is the process of aligning supply and demand across multiple levels of the supply chain. This differs from single level inventory optimization, which focuses on the inventory at one location or point in the supply chain.

Using a real-world example makes this easier to understand. Imagine your local Chevrolet dealership. Their goal is to have the ideal amount of vehicles on their lot to meet customer demands. They need enough of the cars, trucks, and SUVs on their lot to sell to people. If they have too few trucks, customers will go to another dealership that has what they want. If they have too many trucks on the lot, they can sit there for too long and probably end up selling at a lower price.

A multi-echelon approach focuses on the entire supply chain, instead of that one dealership. The goal is to optimize the inventory at other car dealerships, the distributor shipping cars to the dealership, and the manufacturers that are making the vehicle parts. The dealership might have sufficient supply right now, but if the manufacturer is running low on transmission parts, the inventory interruption will eventually reach the individual dealership.

Supply chains come in all different sizes. 

Some supply chains only involve a supplier and a customer. Like a farmer selling eggs at a farmer’s market. Other supply chains have tons of moving parts. A raw material supplier, manufacturers, logistics providers, wholesalers, distribution centers, and local stores.

Multi-echelon inventory optimization increases visibility that reduces cost across the supply chain, helps with demand planning,  and streamlines operations.

Single level vs Multi Echelon Inventory Optimization
Single-Level vs Multi-Echelon Inventory Optimization

Benefits of Multi-Echelon Inventory Optimization

1. More cost-efficient

When businesses have a good inventory management strategy, they’re able to maintain the ideal stock levels throughout their supply chain. Having excess inventory, and not enough inventory hurts profitability. Holding too much stock ties up working capital, adds carrying costs, and eventually leads to dead stock. The excess stock is either sold at a lower price, or thrown away. Not having enough stock to meet demand causes companies to lose sales to competitors. MEIO helps companies make better use of their capital, and maintain optimal inventory throughout the supply chain.

2. Better lead times

When there are multiple stages in the supply chain, providing fast and accurate lead times can be challenging. A manufacturer knows how long it takes to complete an order, but if they’re waiting for the supplier to send more raw materials, the estimated lead time can be wrong. Multi-echelon inventory optimization gives companies a more accurate estimate of stock throughout the supply chain. And when a customer places an order and the inventory is optimized everywhere, the order can be fulfilled much faster.

3. Better volatility management

Volatility in the supply chain is never 100% unavoidable. Since the different stages of the supply chain are intertwined, volatility at one stage has a ripple effect that’s felt everywhere. MEIO helps companies maintain optimal levels of stock throughout their supply chain. Having enough stock at each point of the distribution networks boosts agility and lessens the impact of volatility. And having an accurate view of inventory at every stage helps them provide accurate lead times when there are unexpected delays.

4. Improved return on investment

Maintaining an efficient supply chain is a big part of a company’s profitability. Access to more accurate info allows companies to make decisions based on real-time data and current conditions. One study from Geodis found that 57% of companies view supply chain efficiency as a competitive advantage, but only 6% of companies have full visibility of their supply chain. 7/10 companies also describe their supply chain as very or extremely complex. Having a multi-echelon view of inventory enables businesses to increase efficiency and profitability.

5. Improved customer service

A lack of proper inventory management causes products to run out of stock. The supply can’t meet the current customer demands. When a customer can’t get what they need quickly, they get frustrated and start looking around for other options. This starts upstream in the supply chain. When you go to a grocery store and your favorite cereal is out of stock, it could be because the store didn’t order enough. It could also be that the distributor didn’t have enough. Or the manufacturer didn’t produce enough. Or the grain supplier didn’t have enough raw materials. When companies use multi-echelon inventory optimization, they can successfully forecast optimal levels of stock throughout the supply chain network—meeting demand and keeping customers happy.

If you’re looking for a reliable supply chain management solution, reach out to our team to learn more about how we can help as a manufacturing partner.

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