What is Multi Echelon Inventory Optimization?
As a wholesaler or retailer gets to a certain size, their distribution network commonly starts to incorporate multiple levels of stocking locations. For example, a distribution network may be characterized as ‘Hub and Spoke’ where there are ‘master’ distribution centers and dependent satellite branches.
Sometimes this relationship between warehouses is called a ‘Parent / Child’ relationship. The inventory from the suppliers is ordered into the master or hub warehouses, and then fed to the satellite warehouses as needed.
Setting up these multi-tier or multi echelon inventory distribution networks for proper replenishment presents challenges.
Challenges of Multi Echelon Inventory Optimization
Often companies will use one system and approach to buy product into the master warehouses, and another system or another process to get product down to the branches. There is typically at least review (if not complete control) given to the branch / store managers to determine what product should be ordered into the stores from the distribution centers.
When managed in this fashion, the relationship between the warehouses and the branches / stores can be disjointed in terms of inventory. How do you order properly from the vendors to stock the warehouses for the warehouses’ own independent demand as well as the optimal quantities needed to supply the requirements of the branches?
Obviously, mistakes in calculating the overall need when cutting PO’s to the vendors can be very costly. If the master warehouse runs out of supply, then the whole network relying on that warehouse is out of luck unless there are other master warehouses where supply can be transferred from.
Secondly, without visibility and rollup of actual projected requirements from the branches / stores, it is very difficult to maintain optimal amounts of inventory at the master warehouses. So there will be too much time supply of some items, and stockout of others.
Multi Echelon Inventory Management System
Thrive handles these multi echelon inventory management needs by doing the following:
- Honors each tier’s lead time when calculating the requirements of the network for each SKU
- Individual network for each SKU
- Forecasts at lowest level for each SKU, calculating optimal stocking levels and replenishment
- Rolls up needs to the next tier based on lead time
- Can use smaller transfer pack sizes
- Generates ‘orders’ from lower level tiers to parent