Inventory is one of the retailer’s biggest assets. With the growth of omnichannel fulfillment across the industry, multi-echelon inventory optimization is a key way to manage the increased complexity of having inventory in the right place at the right time. Inventory decisions have the power to impact all aspects of the organization, including customer experience, cash flow, distribution operations, transportation costs and profitability. With such a broad range of impact, inventory management should not be taken lightly.
What is Multi Echelon Inventory Optimization (MEIO)?
Multi-echelon inventory optimization (MEIO) is an inventory optimization strategy that positions inventory in the most effective and cost-efficient points in the supply chain by looking at multiple levels of demand. MEIO drives the most success in managing omnichannel inventory with its unique focus on integrating data across the supply chain, accurately forecasting demand and dynamically positioning inventory to reduce costs and improve service levels.
Differences Between Multi-Echelon Inventory Optimization and Traditional Inventory Optimization
Traditional inventory optimization focuses on getting the right inventory in the right place at the right time and typically only looks at one layer of demand. Traditional inventory optimization looks at individual geographical locations and bases inventory flow on that one metric. This can lead to suboptimal movement of inventory, such as sending all shorts during the winter season to your southern stores and none to the northern stores. While retailers maximize demand by location, they ignore opportunities where future demand may be low and increase costs to meet it.
Multi-echelon inventory optimization encompasses all of the same aspects as traditional inventory optimization but then takes it one step further. MEIO focuses on driving inventory to specific points in the supply chain in order to position product effectively and cost-efficiently. This strategy will look at multiple levels of demand forecasting to ensure that the right product is always placed in the right node to meet the brand promise to the customer. It also considers the characteristics of demand at each node, like stability vs. variability, to determine the most effective storage location.
Benefits of Multi-Echelon Inventory Optimization for Omnichannel Retail
MEIO targets the specific challenge of positioning inventory in the right store, hub location, vendor or distribution center. One of the biggest benefits of multi-echelon inventory optimization to retailers is increased omnichannel profitability. The main goal of omnichannel fulfillment strategies like MEIO is to maximize margin by reducing costs.
MEIO challenges popular forms of inventory management, showing how they hinder profitability. For example, traditional inventory management may support filling online orders from store inventory, but MEIO reveals the negative impacts of this strategy, such as removing viable inventory for in-store customers. When MEIO is successfully executed, not only do you have the inventory levels you need for ecommerce orders sitting in the correct nodes optimized for cost-effective shipping, but your store associates are enabled to focus on raising customer service levels.
MEIO offers several other key benefits for omnichannel retailers, including:
- Delivering a consistent brand experience and higher service levels
- Reducing operating expenses
- Achieving higher margins
- Increasing productive inventory
- Focusing on assortment and planning
- Experiencing top line growth
- Reducing mark-down risk
Multi-Echelon Inventory Optimization Strategy
For retailers, achieving MEIO means understanding that each node of their supply chain has a particular purpose. MEIO strategies should focus on not only what is the most efficient and cost-effective, but also what helps meet and exceed customer service levels.
To successfully achieve multi-echelon inventory optimization, there are four areas of focus that retailers should attend to: inventory visibility, sales and operations planning, omnichannel assortment planning and product flow.
Inventory Visibility
The first step to achieving multi-echelon inventory visibility is to create and maintain a cohesive and accurate view of stock levels across all channels, whether that be in the brick-and-mortar store, on the desktop website or the mobile app. Maintaining inventory accuracy and visibility across the entire supply chain network will help meet customer needs and optimize service levels.
Sales and Operations Planning
Leveraging sales and operations planning will establish inventory targets across the supply chain cascading to a more granular level. This is especially important with multi-echelon inventory planning because it will ensure that inventory is consistently running through the correct nodes.
Omnichannel Assortment Planning
For omnichannel retailers, reducing stock and freeing up capital is key for maximizing margin and reducing costs. Achieve this by identifying a clear direction of how to optimize and localize merchandise across channels, geographies, brands, delivery lead time commitments and more. This will reduce unproductive inventory while maintaining an integrated and consistent brand experience for customers.
Manage Dynamic Inventory Flow
What sets MEIO apart is its multi-level demand and inventory planning that goes beyond traditional inventory optimization. For retailers, this means taking a deep dive into data for insight into customer demand. MEIO considers detailed demographics and customer patterns, often leveraging AI and ML, to ensure inventory is flowing through the correct nodes. Achieving dynamic inventory flow will maximize profitability and give you more control over inventory and profit margins.
Implementing a Multi-Echelon Inventory Optimization Strategy
Understanding why MEIO is most cost-effective for your organization is just the first step. Next, it’s important to know how to implement MEIO strategies into your organization and what challenges you might face.
Components and Challenges to Consider
- Artificial intelligence (AI): Many supply chain planning software tools can leverage AI tools to enhance processes like demand forecasting and inventory allocation. Consider where you could add AI to your existing software to improve efficiency and accuracy in your inventory optimization.
- Measuring success: Any new initiative should involve key performance indicators (KPIs) that will measure success. To measure the success of multi-echelon inventory optimization in your organization, consider tracking KPIs like inventory turnover, fill rate, service level, stockout rates, order cycle time and inventory carrying costs.
- Organizational silos: The core value of MEIO is its cross-functional collaboration between echelons. Many organizations that have not been leveraging MEIO will have silos across their organization. Be prepared to bridge these silos to better accommodate a cross-functional approach to inventory optimization.
- Data quality and availability: Quality data is essential for successful multi-echelon inventory optimization. Inaccurate data can lead to poor inventory decision making. Before you dive into MEIO, do an audit of your data and make sure it is accurate and visible.
enVista Can Help: Leverage Our Supply Chain Planning Consulting Today
Multi-echelon inventory optimization is no simple task and should not be done alone. Supply chain planning consulting can help. Leverage a partner that understands the entire supply chain planning process, from concept to consumption, knows how product flows through your distribution network and understands the cost associated with your product and where it resides.
Let’s Have a Conversation®
enVista’s supply chain planning consultants, with their extensive retail, inventory and product flow expertise, can help you develop an MEIO solution that works for your business needs. We take the guesswork out of optimizing inventory. enVista is an end-to-end supply chain consulting and optimization solutions firm that can turn your strategy and supply chain model into a competitive reality. Let’s have a conversation. ®
