For companies that rely on a complex supply chain, one popular inventory strategy is multi-echelon inventory optimization, also known as MEIO. The word echelon, in MEIO, refers to different locations or stages in the supply chain network, including suppliers, manufacturing facilities, distribution centers, and physical or online retail stores.
The primary goal of MEIO is to carefully optimize inventory levels across every single supply chain echelon by improving performance, profitability, and productivity. In this article, we’ll do a deep dive on multi-echelon inventory optimization and its key pillars and benefits.
What is multi-echelon inventory optimization?
Multi-echelon inventory optimization (MEIO) is an inventory management strategy in which supply and demand are carefully aligned across multiple supply chain stages. Unlike single-level inventory optimization, which is only concerned with inventory control at one particular point in the supply chain, MEIO optimizes inventory at every location in the network, even though optimal inventory levels vary for each echelon.
In fact, the goal of MEIO is to optimize inventory at every stage and each location—including raw material suppliers, manufacturers, logistics, wholesalers, distributors, and local and online stores—so that every echelon has precisely what it needs to avoid shortages or stockouts, but not so much inventory that goods are at risk of obsolescence or cash flow is unnecessarily tied up.
Industries that benefit most from MEIO include manufacturing, automotive, electronics, pharmaceuticals, and retail. The manufacturing industry relies on incredibly complex supply chains, and the automotive industry often uses thousands of parts sourced from hundreds of suppliers to build a single car. The electronics industry is at high risk of obsolescence. When a newer, better product is introduced, the old one becomes less valuable or even worthless, underscoring the importance of a tightly managed supply chain where inventory is carefully controlled.
The pharmaceutical industry, for example, has a financial and ethical responsibility to manage medications tightly across markedly complex supply chains. Medications expire quickly, and they’re essential to keep people worldwide well. Retail, too, is a great candidate for MEIO since inventory is often managed across multiple locations, from physical stores to distribution centers and warehouses.
Key pillars of multi-echelon inventory optimization
There are a variety of important tenets of MEIO, including:
1. A mapped-out supplier network
MEIO requires stakeholders to design an optimally structured supply chain network. This map should identify the number and location of facilities at every stage of the supply chain, from raw materials suppliers to retail stores.
A properly designed supplier network should also articulate key factors such as lead times and transportation costs. The goal is to create a detailed, complete picture of the supply chain network, including how materials move from one location to the next, how quickly, by what means, and at what cost.
2. Accurate demand forecasting
To implement MEIO, accurate demand forecasting is essential. This information helps anticipate customer demand at every stage in the supply chain, helping stakeholders determine appropriate inventory levels so that orders can be placed entirely and with confidence at the right time at every echelon.
3. Optimized inventory levels at every echelon
Again, accurate demand forecasting is essential for any effective MEIO strategy. Decision makers at every echelon should understand the optimal inventory levels for the goods and materials they keep on hand, or may be asked to supply to another echelon.
The science of determining exactly how much of a given item a certain echelon should stock is known as inventory control. Inventory management software can help businesses in every stage of the supply chain keep better track of the inventory they have on hand, where it is at any given moment, and how much inventory has been consumed in the past.
4. Streamlined ordering processes
Once every echelon understands how much inventory it needs to meet customer demand, use key inventory formulas to determine economic order quantities, safety stock levels, reorder points, and lead times for all products.
These formulas balance your inventory needs with the realities of the suppliers that provide inventory to you. By recalculating these formulas as part of a new inventory control strategy, every echelon can do its part to balance customer service and cash flow.
For echelons unable to implement inventory control for every item on their inventory list, consider using ABC classification in the interim. ABC analysis helps businesses identify the most profitable and essential items on their inventory list, then encourages the tightest inventory control to be practiced on those most important items.
5. An emphasis on data and analytics
The more numbers and figures stakeholders can access, the more optimized the MEIO strategy. By utilizing technology your employees can maintain, you’re much more likely to unlock critical data and insights that can improve demand forecasting, reveal which suppliers have become too unreliable, and help businesses keep track of inventory across multiple locations.
Experience the simplest inventory management software.
Are you ready to transform how your business does inventory?
Benefits of multi-echelon inventory optimization
There are various benefits to implementing multi-echelon inventory optimization, including reduced inventory costs, improved customer service and satisfaction, and increased efficiency across the supply chain network.
MEIO can also protect businesses from supply chain volatility. While it’s impossible to insulate any company from all supply chain vulnerabilities, MEIO ensures all pieces of the supply chain work together at every stage to ensure that demand is met and risks are mitigated.
Improved supply chain visibility, which can be unlocked through MEIO, often leads to a more organized and optimized multi-echelon supply chain network. By thoroughly mapping out how your supply chain network operates, you’ll better understand its vulnerabilities, allowing you to preemptively replace unreliable partners with those that are faster, more communicative, and perhaps less expensive.
Improve your MEIO strategy with Sortly
If your business is interested in implementing an MEIO strategy, modern inventory management software can automate many inventory-related tasks, streamlining inventory management while helping your team maintain accurate inventory records.
This information can be used to set the foundation for a successful MEIO strategy, helping your business understand current and past inventory usage, set minimum inventory levels, and even help avoid stockouts and shortages by alerting you when inventory is set to expire, fall out of warranty, or fall below your safety stock threshold.
Sortly is an easy inventory solution designed for on-the-go use across multiple locations. It’s so intuitive that anyone on your team can learn to use it quickly, on any device. With Sortly, you can track inventory, supplies, parts, tools, assets like equipment and machinery, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more.
Learn more about how Sortly can help your team implement better inventory control with a free, two-week trial.
