Multi Echelon Inventory Optimization (MEIO): Challenges & Impact

Supply chain executives worldwide face an ongoing dilemma: improve customer service levels but don’t create excess or obsolete inventory at the same time.

It’s a double-edged sword for supply chain performance. Because of variability in demand and supply, increasing customer service levels can lead to higher levels of safety stock. Improving cash flow by indiscriminately reducing working capital dollars can result in slashing the wrong inventory, resulting in lower customer service levels.

While many supply chain teams have conducted IO initiatives to raise service levels while lowering inventory cost, others worry that they won’t be successful in the effort.

The Two Key Barriers

Two common barriers often prevent an organization from reaping IO benefits:

■ Technology: Success is often undermined by reliance on limited tools (such as modules built into, or bolted onto, existing ERP systems) or inadequate ones (e.g. error-prone, hard-to maintain spreadsheets). These tools are unable to effectively analyze and model the required amount of inventory.

■ Complexity: An internal perception that understanding and implementing proven mathematical tools and business processes in order to streamline the creation of optimal inventory policies and targets is too difficult for the team to take on.

Overcoming these barriers is easier than you think. Companies that embrace IO, either at a single stage or across their full, multi-echelon network, achieve on average a 28% increase in inventory turns.

How do you remove these barriers?

A simple three-step approach can remove barriers to achieving a successful IO initiative.

First, assess your organization’s capabilities from these perspectives:

■ Inventory performance

■ Business process and inventory management expertise

■ Technology and organizational readiness

Understanding your current state on these critical dimensions lays the foundation for a solid business case that can deliver real-world benefits.

Second, create a future state, IO capability—process, technology, organization—that provides your supply chain team with a roadmap to success.

Finally, continue to drive fundamental strategic changes that create greater resiliency and agility throughout the supply chain and establish a cycle of continuous improvement for years

Top areas of impact

1) Tactical and Strategic Inventory Modeling

Tactical modeling compares actual demand to forecast, and actual receipt of goods to the plan for each SKU. Tactical modeling identifies forecast accuracy and safety stock issues. Adding historical forecast accuracy into the equation enables predictive service level calculations. This fact-based approach to inventory targets allows you to right-size inventory by SKU.

To answer more difficult questions, such as where to make or stock products or the impact of distribution or manufacturing facility closures or openings, use strategic inventory modeling. It can provide quick, side-by-side scenario analysis to help make the right decisions.

2) Demand management & forecasting

MEIO enables timely answers to complex “what-if” questions including impacts of channel changes and stocking policies across a complex and volatile omni-channel distribution network.

MEIO users are more likely to launch an initiative to improve forecast accuracy due to seeing greater improvement in inventory modeling from better forecast accuracy.

3) Inventory replenishment strategies

Improving inventory replenishment strategies include postponement strategies, cycle time and supplier improvements, and changes to replenishment parameters. The addition of a formal MEIO platform can help pinpoint which products are susceptible to supply issues so that root cause and corrective action can be applied.

Key aspects to keep in mind

If your organization is considering an inventory optimization initiative, ponder these points:

Usability—From effective use of exception workflows, to visibility into the drivers of inventory, to exposure of underlying computations, to end-to-end models for sandbox-style evaluations, choose a solution that will empower users across different areas of your business to perform their jobs more efficiently and deliver more value to the bottom line.

Tactical Target Setting—When setting tactical targets on an ongoing basis, make sure you can automatically characterize demand and uncertainty, both in lead time and in the demand signal.

Configurability—Not all supply chains are alike, even in the same organization. Choose a solution that can be adapted to your supply chain’s specific inventory optimization needs.

Flexibility—Some inventory cannot be statistically modeled. Make sure the solution you select can set smart inventory parameters for your most problematic SKUs.

Data Complexity—Getting data into and out of a powerful MEIO tool is a major consideration. Select a software provider who can diffuse this concern by providing powerful integration tools with little or no customization required.

Risk Aversion—The right IO/MEIO approach can do more than deliver better service levels. It can also make your C-Level team happy by identifying and mitigating risk.

Strategic Modeling—Once tactical processes are in place, turn your efforts to year-over-year improvements. The right solution will give your team powerful tactical and strategic planning capabilities to perform comprehensive analytics across your supply chain for valuable business insight.

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