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Multi Echelon Inventory Optimization (MEIO): Why inventory optimization isn’t always enough

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What is MEIO and what is its key value?

Manufacturers have to consider two different approaches to managing their inventory in order to continue growing and to keep customers happy: inventory optimization (IO) and multi-echelon inventory optimization (MEIO). With IO there is typically only one stocking point between supplier and customer. A multi-echelon environment differs by at least one additional, and sometimes several stocking points between supplier and customer.

Both IO and MEIO intend to match inventory levels to accommodate forecasted demand in as efficient and effective a manner as possible.

Companies around the globe are faced with more and more complexity in their supply chains. An increasing portion of inventory is made up of products with intermittent, unpredictable or so-called long tail demand. This not only applies to large e-commerce players like Amazon and Alibaba, but also to small businesses that need to tackle more slow-moving items with unpredictable demand patterns. This makes demand forecasting and inventory management more challenging. This is where MEIO can help.

According to Aberdeen Group research, businesses deploying MEIO:

  • Double the probability of properly balancing cost versus service levels across their networks than companies not using MEIO.
  • Are twice as likely to set smart targets in their S&OP process.
  • See a 28% rise in inventory turns while keeping customer service levels on a par or in fact improving these.
  • Realize a reduction in inventory levels by 10 to 30% or more by automating the overall inventory planning process in multiple step value chains.

Why you should move beyond inventory optimization.

Inventory optimization (IO) is designed to model demand, thus determining appropriate inventory for individual echelons in the supply chain. Most inventory optimization solutions manage stock at each stage separately, for example, optimizing supply at the warehouse level separately from the factory level.

MEIO takes managing inventory to the next level by optimizing stock levels across the entire value chain. The primary focus of inventory optimization is on getting individual stock levels right at separate stages of the value chain.

Think of the traffic controller at O'Hare International Airport with the task of managing inbound & outbound flights on one runway. This is quite a challenge that clearly needs to be complemented by an overall flight traffic conductor. This conductor would not only watch operations at all of the local airport’s runways yet would also oversee relevant information from the many airports that are connected to O’Hare Airport. Multi-Echelon Inventory Optimization (MEIO) performs this overall orchestration role.

The value of MEIO is increasingly recognized. MEIO solutions apply to inventory optimization for complex supply chains with a high need for overall orchestration. An effective MEIO solution suggests the right levels of inventory at each stage of the supply chain by managing and optimizing inventory balance across multiple echelons and locations in parallel. With a MEIO approach, businesses use an all-encompassing view of the supply chain and demand forecasts across multiple stages in that value chain.

Why you should move beyond inventory optimization.

Here are three questions to ask when considering MEIO:

1) What ambition in inventory optimization does your company have?
If your company’s value chain is a relatively simple, single echelon, with modest volatility, MEIO may be over-engineering your inventory optimization. When your company manages a multiple-step value chain, is facing unpredictable demand and has to meet the expectations of a demanding clientele, MEIO might make sense.

2) What is the level of transparency in your value chain?
Transparency and visibility across the value chain is imperative for MEIO to work. Without the right visibility, companies run the risk of overstocking inventory when trying to boost a value chain’s on-time delivery performance. In a multi echelon value chain, the regional distribution center needs to not only consider the demand from its immediate customer (the distribution center), but also the end customer that is receiving the products. Supplier information is thus required both at the regional distribution center and the distribution center level.

3) Is inventory optimization the primary challenge for your supply chain?
MEIO is not some kind of magic bullet that will solve all inventory challenges across the value chain. It does provide a more holistic and integral framework and approach to orchestrating your chain. The best stock levels take into account both historical data and future effects of parameters on multiple locations, not just a single location. The same applies for forecasting and other policies. MEIO may lead to changing roles, responsibilities and performance measurements, which in turn need to be considered from an holistic perspective.

 

So you’re ready for MEIO?

 You’ve answered the questions above and you’re ready for MEIO. Great! You have many options to choose from when shopping for MEIO solutions. We at John Galt are biased, of course, but we recommend taking a look at our Atlas Planning platform. Many inventory management solutions use linear programming to calculate stock level recommendations. John Galt’s Atlas Planning uses machine learning to model your inventory network in real-time, for continuous inventory optimization. In your evaluation, be sure to ask how stock levels are calculated and how the solution utilizes artificial intelligence.

 

For more information about supply chain management best practices and what steps you need to take before making that leap, schedule a free consultation with one of our Demand Planning Xperts today. Our Atlas Planning and ForecastX solutions can help you Walk-Drive-Fly into properly optimizing your inventory levels across the value chain.


About John Galt Solutions

More than ever, companies must be able to sense and respond to the dynamics of a complex supply chain. John Galt's Atlas Planning is a unified end-to-end supply chain planning platform that helps you increase forecast accuracy, optimize inventory levels and maximize supply chain performance. Since its founding in 1996, John Galt Solutions has built a proven track record of providing affordable, automated demand and inventory management services for consumer-driven supply chains. We have an unmatched ability to configure tailored solutions for customers, regardless of size, industry, or business challenge, that save both time and money by compressing implementation periods and delivering intelligent information that positively impact your bottom line.

To learn more about John Galt Solutions, contact our press office at 312-701-9026 or visit www.johngalt.com.




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