Multi-echelon inventory optimization models inventory levels across multiple stages of the supply chain. Traditional models plan inventory independently at each stage, leading 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 costs across the entire supply chain while meeting customer service level goals. By modeling demand variability and relationships between stages, MEIO can identify the optimal inventory levels for each stock-keeping unit to reduce redundant safety stock and improve service levels compared to planning inventory independently at each stage.

1. Multi-echelon InventoryOptimization

2. Echelon – what it is?
• An echelon is alevel or some height. In inventory it is
synonymous withthe 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 canlead tovery high inventory build-up. Thisis the way
distribution inventory is possibilitybuilt-up.
• Theproblem hasalso alot of importance in modern“Supply
Chain Management”.
• It is proved that that the costs canbe minimized for the chain
asawhole, rather than adding up the minimum inventory
costs at each locations or echelons, based onEOQs.

3. What’s MEI?
• Traditional inventory models often usenormal
distributions, only forecast accuracy,single location,and
don’t consider up- and down-streamSKU-L’s.
• Multi-Echelon Inventory optimization movesbeyond
traditional assumptions for demand behaviour and
demand variability.
• Itconsiders impact of upstream and downstream
inventory to delivering customerservice.
• Models can be built to deliver the best possible service
levels – at minimum inventory holding – foreachSKU.

4. Problems in not followingMEIO
• Thenetwork carries excessinventory in the formof
redundant safety stock.
• End-customer service failures occur even when
adequate inventory exists in the network
• External (outsourcing) suppliers deliver unreliable
performance, becausethey have received
unsatisfactory demand projections.
• Internal allocation decisions canbeerroneous.

5. Inventory Drivers for aSKUlocated at aDC
• Demand: Rateof product flow out of the DC
• Demand Variation: Fluctuation of the product outflow from
period to period
• LeadTime: Expected time delay between ordering andhaving
new product available to fulfilldemand
• L
TVariation: Fluctuation of the lead time from order to order
• Replenishment Review Frequency: Frequency with which theDC
checks its inventory position to seeifanew order is needed
• Order Supply Strategy: TheDC’stime supply objective, which
depends on the economic trade-offs between carryinginventory,
handling, transportation and purchasecost
• Service Level Goal:TheDC’sservice commitment to end
customers
• Inventory Position: TheDC’savailable stock, taking into account
the on-hand inventory, on-order quantities, back orders and
committed stock