Modern supply chains are far from linear. They now resemble complex labyrinths, where balancing overstocks and stockouts is merely the starting point. In this dynamic environment, businesses must meet rising customer service expectations while driving innovation and growth. Such complexity drives demand volatility. This urges a shift from the unsustainable practice of buffering against uncertainty with high inventory levels.

Enter Inventory Optimization (IO) as a vital strategy to combat supply chain stress. Yet, recent research suggests a more advanced approach, Multi-Echelon Inventory Optimization (MEIO), surpasses traditional methods. In fact, Aberdeen Group reports that MEIO is twice as capable of balancing cost and service levels across the network, compared to conventional IO strategies. 

MEIO vs. IO

So, what sets MEIO apart from traditional IO strategies that determine inventory levels based on current demand? Powered by prescriptive analytics, it calculates time-phased safety stock targets driven by future forecasts, enabling companies to satisfy customer needs at the lowest total supply chain cost.

Traditional approaches spread out finished goods across multiple layers of the supply chain network, MEIO goes a step further with artificial intelligence (AI).

With machine learning, predictive analytics, and algorithmic optimization, MEIO can identify the many causes of inventory shortages and excesses. It considers interdependencies among suppliers, production stages, distribution centers, warehouses, and customers, as well as the cost of all materials flowing through the supply chain. They include costs, demand signals, supply volatility, and sourcing. At the same time, stock locations and amounts across all inventory types in a supply chain network can be optimized.

Then, MEIO algorithms model inventory flows through every interdependent stage and location of a supply chain. This approach creates an optimal configuration of internal and external inventory buffers to handle demand and supply uncertainty. Component, raw, work-in-process (WIP), and finished goods inventory can also be modeled to ensure the right amount of each good is stocked in the right locations, enabling powerful postponement strategies.

By creating time-phased safety stock targets driven by a future forecast, MEIO helps businesses satisfy customer needs at the lowest total supply chain cost by answering questions, including:

• How much inventory is necessary to support your service level objectives while handling demand uncertainty and supplier volatility?
• How much buffer stock is required, and where should it be placed?
• What should the total inventory investment be, including safety stock and holding costs?
• How much more inventory will we need to support a new customer’s business?

Most importantly, multi-echelon inventory optimization can change the status quo and create a series of new curves that deliver a desired service level at less cost than the former state allowed – and the results achieved by companies worldwide speak for themselves. 

“Many supply chain organizations have found significant benefits by revamping policies and modifying stock buffers through this approach,” Lisa Henriott, SVP at Logility said in Supply Chain Dive. “MEIO makes strategy operational and can optimize up to 80% of inventory in 120 days, reduce inventory costs by up to 15%, and increase service availability by up to 5%.”

All these outcomes from multi-echelon inventory optimization translate into millions – and in some cases, billions – in working capital freed up from excess stock and carrying costs!

A Proven Three-Step Approach to MEIO Implementation

MEIO empowers organizations to optimize inventory management and improve supply chain efficiency, making it a compelling solution for their inventory management challenges. And it’s not difficult to get started, as you may think.

A simple three-step approach has been proven effective for achieving a successful MEIO initiative:

• Assess: Evaluate your organization’s capabilities in inventory performance, business processes, inventory management expertise, and technology and organizational readiness.
• Plan: Road map your future-state MEIO capabilities – including processes, technology, and organizational structures – to give your supply chain team the tools and resources they need to succeed.
• Execute: Drive fundamental strategic changes to enhance supply chain resiliency and agility and establish a continuous improvement cycle to ensure ongoing optimization and adaptation.

This approach lays the foundation for a successful multi-echelon inventory optimization initiative, empowering organizations to optimize inventory management and improve supply chain efficiency. The benefits extend far beyond just inventory reduction.

Clarios, formerly Johnson Controls Power Solutions, is a prime example of how MEIO elevates inventory management and delivers world-class service. Serving over 10,000 customer locations worldwide, the global leader in smart energy storage technologies for the automotive industry strategically applies MEIO principles to pinpoint areas for inventory enhancement and ensure optimal inventory levels without compromising service quality. 

Clarios is now achieving significant cost savings, optimizing inventory levels, and enhancing service availability – creating a standard of excellence in inventory management within the automotive industry and beyond. As MEIO continues to revolutionize inventory management practices, the company is ready to leverage this advanced approach to unlock new avenues for growth, efficiency, and competitiveness.

A best practice for translating strategy into action

Multi-echelon inventory optimization heralds a new era in inventory management, representing a paradigm shift fueled by advanced analytics and algorithmic optimization. As supply chains evolve in complexity, MEIO will remain a vital tool for confidently navigating ever-evolving challenges and positioning the business for success in any economic condition.