Supply Chain Planning Blog

Multi Echelon Inventory Planning Demystified!

Posted by Cyrus Hadavi on Fri, Apr 16, 2010
 

Inventory PlanningInventory is a very interesting phenomenon! You never know exactly how much you need until you actually need it or you know you have excess until it is too late! The major problem, or should I say opportunity, is that inventory is a function of both time and randomness. Randomness has to do with your competitors pricing, quality, weather, economy, acts of God, contagious disease, strikes, etc.  All of these factors and many others have an impact on your demand. For example Toyota's quality problems lead to increase in demand for other auto makers, warm weather increases demand on beer, N1H1 outbreak increased the demand for certain type of medication.

So you ask yourself, how often do we have such events and should I care? The answer is Yes! Because the weather maybe more predictable than your competitor and your customers' forecast!  In other words, it is very hard to tell how your competitors are going to change the game and take market share from you, or how your customers can change the demand based on how they feel and market conditions. So it is a constant game of balance between Supply and Demand. If you play the game long enough then you should become an expert.   Just like chess you can develop strategies to make the right move and be prepared no matter what your competitor does or what the changes in demand are. Being prepared is what the science of inventory planning is all about. We refer to this as Inventory Optimization. It allows you to decide how much inventory is enough, where and when. The two factors that you need to be concerned about are Cost and Service Level. On one hand you can have every possible item available in Finished Goods which is inconceivable. Or keep no inventory, another unlikely scenario. People talk about "zero" inventory; I am not sure what this means?  Does it imply that every time I want to buy a note book, somebody needs to go out and chop a small tree down and put it through the paper mill?  But one thing is for sure, your optimized inventory level is some place between those two points.

Inventory planners, like any other type of planners, need to have their slide rule (some of you may not be as old as me to know what these are!) or their calculators, to figure out where and when they should keep inventory up and down the supply chain. This is a very complex problem even without the randomness that we talked about. There are many different products each with their own Bill-of-Material and different production routings and capacity requirements. Shared resources and inventory buffers, as well as raw materials, are needed to build and store intermediate products at different stages of production. Very often subcontractors, distribution centers, consignment locations, and hubs are also part of the equation. I think you all agree that spreadsheets are too simple and rigid to do the job even-though it is of the most widespread tools. Now let's add randomness and seasonality to this. Are we having fun or what?

Here is the good news, an MEIO (Multi echelon Inventory Optimization) system is designed to be the tool that inventory planners need to deal with exactly the kind of problems that we just talked about. It has the capability to model different layers of supply chain, take randomness into account at every stage, look at the cost and service level requirements, and then come up with how much of what needs to be kept at every critical point of the supply chain. And if you don't like what it proposes, you can change the parameters and run it again and it will give you other alternatives so that you can make a wise decision. Think of it like what a structural engineer does when she designs a high-rise. The load at every floor can be different, the structure may have to be resistant to winds of up to 60 miles an hour, and there might be earthquake and fire hazards to consider.  Given all these potential "random" events the structure needs to deliver certain level of safety (i.e. service level) to its residents. The optimization programs that Structural engineers use resembles very much the MEIO system that we described above. It shows you how to build a supply chain that can be resistant to changes at lowest cost. The only difference is that in our building analogy you do it once, hoping that it will last forever.  However, using an MEIO system, you have the opportunity to re-design your inventory plan on weekly or monthly basis so that your supply chain can withstand new conditions. That is the beauty of a system which allows you to have enough flexibility to change with your demand, business conditions, management objectives, and moves of your competitors!

Multi Echelon Inventory Optimization systems are fairly new in the market but picking up a lot of momentum by helping to solve a common and complex supply chain problem--as Demand Planning systems did starting a decade ago.  The right MEIO solution can make your supply chain a lot more efficient, save a bunch of money, and most important of all make your customers very happy.

We have a comperhensive ePaper on this topic, just click on: Demystifying MEIO.

 

Cyrus HadaviDr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please click here.  

 

 

For more information about different types of Supply Chain Planning systems visit: Demand Planning, Inventory Planning, or Sales and Operations Planning.

Topics: Multi Echelon Inventory Optimization, Demand Planning, Inventory Planning, MEIO, Inventory Management System, Finished Goods, Inventory Optimization