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.

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