1. Multi-echelon Inventory Optimization
Based on the paper by Calvin Lee,
already circulated to you
Chat session-01/12/2012

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. 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. 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. 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