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Multi-echelon Inventory Optimization
Based on the paper by Calvin Lee,
already circulated to you
Chat session-01/12/2012
Echelon – what it is?
• An echelon is a level or some height. In inventory it is
synonymous with the various levels at whi...
What’s MEI?
• Traditional inventory models often use normal
distributions, only forecast accuracy, single location, and
do...
Problems in not following MEIO
• The network carries excess inventory in the form of
redundant safety stock.
• End-custome...
Inventory Drivers for a SKU located at a DC
• Demand: Rate of product flow out of the DC
• Demand Variation: Fluctuation o...
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Multi echelon inventory optimization

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Multi echelon inventory optimization

  1. 1. Multi-echelon Inventory Optimization Based on the paper by Calvin Lee, already circulated to you Chat session-01/12/2012
  2. 2. Echelon – what it is? • An echelon is a level or some height. In inventory it is synonymous with the 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 can lead to very high inventory build-up. This is the way distribution inventory is possibility built-up. • The problem has also a lot of importance in modern “Supply Chain Management”. • It is proved that that the costs can be minimized for the chain as a whole, rather than adding up the minimum inventory costs at each locations or echelons, based on EOQs.
  3. 3. What’s MEI? • Traditional inventory models often use normal distributions, only forecast accuracy, single location, and don’t consider up- and down-stream SKU-L’s. • Multi-Echelon Inventory optimization moves beyond traditional assumptions for demand behaviour and demand variability. • It considers impact of upstream and downstream inventory to delivering customer service. • Models can be built to deliver the best possible service levels – at minimum inventory holding – for each SKU.
  4. 4. Problems in not following MEIO • The network carries excess inventory in the form of redundant safety stock. • End-customer service failures occur even when adequate inventory exists in the network • External (outsourcing) suppliers deliver unreliable performance, because they have received unsatisfactory demand projections. • Internal allocation decisions can be erroneous.
  5. 5. Inventory Drivers for a SKU located at a DC • Demand: Rate of product flow out of the DC • Demand Variation: Fluctuation of the product outflow from period to period • Lead Time: Expected time delay between ordering and having new product available to fulfill demand • LT Variation: Fluctuation of the lead time from order to order • Replenishment Review Frequency: Frequency with which the DC checks its inventory position to see if a new order is needed • Order Supply Strategy: The DC’s time supply objective, which depends on the economic trade-offs between carrying inventory, handling, transportation and purchase cost • Service Level Goal: The DC’s service commitment to end customers • Inventory Position: The DC’s available stock, taking into account the on-hand inventory, on-order quantities, back orders and committed stock

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