multi echelon inventory optimization

5
Multi-echelon Inventory Optimization Based on the paper by Calvin Lee, already circulated to you Chat session-01/12/2012

Upload: anand-ellur

Post on 08-Dec-2014

232 views

Category:

Business


4 download

DESCRIPTION

 

TRANSCRIPT

Page 1: Multi echelon inventory optimization

Multi-echelon Inventory OptimizationBased on the paper by Calvin Lee,

already circulated to you

Chat session-01/12/2012

Page 2: Multi echelon inventory optimization

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.

Page 3: Multi echelon inventory optimization

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.

Page 4: Multi echelon inventory optimization

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.

Page 5: Multi echelon inventory optimization

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