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What is Multi Echelon Inventory Optimization (MEIO)?

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Published: Reading time: 8 min
o9 Solutions The Digital Brain Platform
o9 SolutionsThe Digital Brain Platform
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Multi-echelon inventory optimization (MEIO) is an inventory optimization that focuses on positioning inventory in the most effective and cost-efficient points in the supply chain. In this section, we explore how.

Single Inventory Optimization

To comprehend multi-echelon inventory optimization, it is essential to first explore single-inventory optimization. In single-inventory optimization, supply planning is carried out independently at each location. This approach is suitable for smaller companies with simpler supply chain networks and fewer distribution points and is effective from the point of origin to the end consumer.

Single-Echelon Inventory Optimization

In larger companies, utilizing a single-echelon inventory optimization model poses challenges. By treating each distribution level in isolation, the model fails to acknowledge the interconnected impact of one level on another. For example, applying demand planning or replenishment strategies independently to different echelons of distribution may result in fluctuations in stock levels which adversely affect stock availability across the entire supply chain.

Multi-echelon inventory optimization addresses these challenges by assisting companies in optimizing inventory levels across its distribution networks. This approach integrates inventory optimization (determining the appropriate stock levels at each distribution level) with multi-echelon planning (deciding where to maintain inventory at each distribution level). 

In multi-echelon inventory optimization, companies can strategically manage their inventory across all levels of the supply chain, adopting a comprehensive and global perspective.

What is the difference between traditional inventory optimization and MEIO?

MEIO (Make, Engineer, Install, Operate)  is another approach to managing inventory. It’s more holistic and considers multiple echelons or levels in the supply chain simultaneously. In a multi-echelon inventory system, inventory is held at multiple levels, from raw materials to finished goods, and each level may have its own suppliers and customers.

Key Pillars of Multi-Echelon Inventory Optimizations

1. Well-defined supplier network

MEIO requires stakeholders to create an efficiently structured supply chain network with optimized supplier collaboration. This network outlines the quantity and locations of facilities at each phase of the supply chain, from raw material suppliers to retail stores.

A properly designed supplier network should also specify important factors like lead times and transportation costs. The objective is to construct a detailed, comprehensive overview of the entire network, detailing how materials move between locations, their speed, transportation methods, and associated costs.

2. Precise demand forecasting

Accurate demand forecasting is vital for implementing MEIO. This information helps predict customer demand at each stage of the supply chain. This enables stakeholders to determine appropriate inventory levels and ensures that orders can be placed confidently and in a timely manner at every level.

3. Optimized inventory levels 

Precise demand forecasting is crucial for an effective MEIO strategy. Decision-makers at each level must understand the optimal inventory levels for the goods and materials they maintain or supply to another level.

Inventory management software can assist businesses at every stage of the supply chain. This includes monitoring inventory more effectively, tracking its location, and assessing past inventory consumption.

4. Simplified Order Processes

Once each level of the organization assesses the required inventory to meet customer demand, they have to employ key inventory formulas to calculate economic order quantities, safety stock levels, reorder points, and lead times for all products.

These formulas ensure a balance between inventory requirements and the capabilities of suppliers. By recalculating these formulas as part of a revamped inventory control strategy, each level of the organization can contribute to maintaining an equilibrium between customer service and cash flow.

When multiple levels face challenges in implementing inventory control for every item, they often use ABC classification. ABC analysis assists businesses in identifying the most profitable and essential items on their inventory list, promoting tighter inventory control for those crucial items.

5. Focus on Data and Analytics

The more data and figures stakeholders can access, the more optimized the MEIO strategy becomes. By leveraging technology that your employees can manage, you are more likely to unlock critical data and insights. This can enhance demand forecasting, reveal which suppliers have become unreliable, and enable businesses to monitor inventory across multiple locations.

What are the Benefits of MEIO?

1. Enhanced Cost-Efficiency

In the absence of a robust inventory optimization strategy, companies might store excess inventory across their supply chain. This ensures they’re for meeting consumer demand at various distribution centers. However, it’s ultimately an inefficient and unprofitable approach, often resulting in surplus inventory and significant capital tied up in slow-moving stock. 

Multi-echelon inventory optimization, on the other hand, enables companies to make optimal use of their capital by investing in the right stock levels that can flow seamlessly through the supply chain.

2. Elevated Customer Service

Failure to optimize inventory levels can lead to inaccurate forecasts which result in inventory shortages. This may lead to situations where certain products are unavailable to customers by the time inventory reaches them. Such instances can adversely impact customer service levels, as the company fails to adequately meet consumer demand. 

MEIO enables companies to forecast optimal stock levels throughout their supply network, ensuring that consumer needs are met and contributing to overall customer satisfaction.

3. Improved Management of Supply or Market Volatility

In the absence of optimized inventory levels, companies may find themselves ill-prepared for sudden shifts in market demand or supply. Multi-echelon inventory optimization ensures optimal stock levels throughout the supply chain, enhancing an enterprise's agility to respond quickly and strategically to market and supply volatility at any point in their distribution networks.

4. Enhanced Management of Lead Times

The lack of a strategic inventory optimization approach can impede a company's ability to handle fluctuating lead times; unpredictable changes, often inaccurately estimated by suppliers, can result in stock shortages or excess inventory.

 Multi-echelon inventory optimization aids companies in maintaining optimal stock levels across the supply chain, enabling them to promptly adapt and respond to changes in lead times as they arise.

5. Improved Return on Investment

In the absence of a successful inventory optimization strategy, companies may invest excessive capital in stock that moves too slowly through the supply chain. Multi echelon inventory optimization allows companies to manage optimal inventory levels, striking the right balance to meet consumer demand without excess or shortage. This leads to improved profits and better returns on investments.

Common Challenges when Implementing MEIO

Data Management

Effective MEIO implementation requires visibility at every stage of the supply chain. Accurate, real-time inventory data must be shared across logistics operations to facilitate informed decision-making and collaboration with teams, including third-party logistics. However, managing and sharing this data becomes a significant challenge due to separate inventory policies and controls at each tier of the supply chain. 

Businesses must prioritize maintaining data security while ensuring that every team has the necessary information to monitor and manage inventory effectively.

Supplier Coordination

E-commerce businesses may face challenges in coordinating with suppliers during the implementation of multi-echelon inventory optimization. The inclusion of every supplier is crucial, as they play a vital role in optimizing inventory levels and obtaining buy-in from suppliers, especially for large businesses with multiple suppliers, can also be difficult. 

Overcoming these challenges requires strong supplier relationship management and the adoption of technology solutions that enhance coordination and communication throughout the supply chain.

Legacy System Integration

Many key players in the supply chain still rely on outdated systems that are dedicated to supporting each echelon independently. This results in siloed information which hinders the seamless flow of data between different tiers. 

Adopting a multi-echelon approach necessitates the use of new and advanced technologies that enable improved coordination and communication across the supply chain. However, these technologies may not be compatible with existing legacy systems, making it challenging to integrate them seamlessly.

Types of MEIO

1. Serial: This is the most basic type, where nodes have a single path—indicating one downstream (client node) and one upstream (supplier node).

2. Assembly: In this type, each node has only one downstream but can have multiple upstream connections. It is termed "assembly" because it requires more than one supplier for the node.

3. Distribution: This is the opposite of assembly. In distribution, each node has multiple downstream connections but only one upstream connection. This occurs, for example, in distribution networks with a central warehouse that ships to multiple clients.

4. General: Finally, there is the general case where a node can have multiple connections both upstream and downstream.

Frequently Asked Questions about MEIO

Is implementing MEIO expensive? - Although there might be initial expenses associated with the implementation of new software or technologies, the long-term savings resulting from optimized inventory levels and reduced wastage typically surpass the initial costs.

Can MEIO be integrated with other supply chain management strategies? - MEIO can be incorporated into other strategies such as Just-in-Time (JIT) or Safety Stock calculations to establish a comprehensive supply chain management system.

Are there any risks associated with Multi-Echelon Inventory Optimization? - Like any system, there may be challenges such as integrating various software across different levels or interpreting large amounts of data. Nevertheless, with the appropriate tools and strategies, these challenges can be addressed and minimized.

How does MEIO handle sudden changes in demand? - By utilizing predictive analytics and continuously monitoring real-time data, MEIO (Multi-Echelon Inventory Optimization) systems can promptly adjust to shifts in demand, guaranteeing optimal stock levels throughout all levels of the supply chain.

MEIO Best Practices by o9 Solutions

o9 is trusted by the world's leading companies. Our Supplier Collaboration software approach excels in providing businesses with actionable insights, allows easy collaboration, and leverages built-in models.

Take the first step to achieve insights into your supplier chain management. Make better decisions based on both data and research.

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About the author

o9 Solutions The Digital Brain Platform

o9 Solutions

The Digital Brain Platform

o9 Solutions is a leading AI-powered platform for integrated business planning and decision-making for the enterprise. Whether it is driving demand, aligning demand and supply, or optimizing commercial initiatives, any planning process can be made faster and smarter with o9’s AI-powered digital solutions. o9 brings together technology innovations—such as graph-based enterprise modeling, big data analytics, advanced algorithms for scenario planning, collaborative portals, easy-to-use interfaces and cloud-based delivery—into one platform.

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