How to Best Understand Inventory Optimization

Executive Summary

  • This is an introduction to inventory optimization that explains where MEIO fits into the supply chain planning space.
  • There is a relationship between service level and inventory strategy.

Introduction to Inventory Optimization

Inventory optimization is one of the important supply planning methods. You will learn how inventory optimization works.

What is Inventory Optimization

Inventory optimization is inventory system software that answers the question of how much to keep in inventory, while multi-echelon planning answers the question of where to keep inventory in the supply network.

Unlike supply planning techniques that use sequential processing or calculation, the MEIO inventory system software calculates the level of service level impact of carrying one additional item at every product location combination and then sorts the list of options by their contribution to the level of service levels and selects the best contributor.

Where Inventory Optimization Fits into the Supply Chain Planning Software Space

  • As you can see, MEIO is its own category of supply planning and is one of the three major methods of supply planning.
  • MEIO is the most recently developed method and is also the least understood among supply chain professionals.

The Definition Of Inventory Optimization

  • Inventory optimization is the derivation of stocking levels throughout the supply planning network based on service level targets.
  • Inventory optimization answers the question of how much inventory should be carried, while—as I’ll discuss later— multi-echelon answers the question of where in the supply network quantities should be carried.

Unsurprisingly, these are the two most important questions in supply planning. Although all inventory optimization works this way, specifically how stocking levels are controlled by service levels depends on the individual approach of each particular MEIO vendor.

The inventory optimization inventory system software can be further described by where in the supply network service levels can be set.

I have come to call this either the “inventory service level specificity” or the “service level hierarchy.” This determines how the model is controlled and, therefore, it is important that companies understand what it is and how the control of the level of service differs among MEIO vendors. That is, where the implementing company wants to set the service level must match where the selected software allows the service level to be set. To read more about this topic see the post at the link below.

The inventory optimization inventory system software is further modified by the following:

  • Its Specificity: That is where in the supply chain the service level can be set.
  • Its Automation: How much manual work is required to set the service levels.
  • Its Universality: Whether the inventory optimization can be used by one department, or by multiple departments within a company.

Relationship Between Service Level and Inventory Strategy

The relationship between inventory and service levels is non-linear; higher and higher service levels require disproportionate increases in inventory to support them. The closer service levels come to one hundred percent, the more extreme the costs become. This relationship is one of the best-documented relationships in supply-chain management.

service-level-versus-inventory-cost

This graphic has been seen at one time or another by most supply chain professionals, and it demonstrates the fact that companies must decide what levels of service they can afford and, most importantly, what levels of service their customers are willing to pay for. See this calculated for one’s inventory is critical to setting the appropriate inventory strategy, as well as setting appropriate and reachable fill rate and level of service goals. 

toolsgroup-service-level-inventory-graphic

This is the same relationship with actual data in an inventory optimization application. This can allow inventory strategy to be set for a product location combination a group of product location combinations or for any grouping larger than that. 

This brings up the following question….

SLFMEIO

That is what is the appropriate level of service, where for what items. What is the best inventory strategy? For this one can use the mathematics of inventory optimization as a strategic tool as well as a tool for operations. 

The MEIO Inventory System Software Control Over Service Levels

One of the major differences between MEIO and MRP, DRP and APS systems for supply planning is that MEIO has straightforward control over service levels. In all other supply planning methods, the only direct control over the level of service level is the dynamic safety stock calculation. This can only be calculated locally (at one particular product-location combination) and is only for a portion of the TSL. MEIO can move the entire planned system-wide inventory up or down, much like the water level in a shark tank, and can do so very precisely depending upon the level of service selected.

This offers the supply planner unparalleled simulation capabilities, allowing him or her to tune the supply plan and to do so quickly.

Stages of Supply Chain Management

Supply chain management has had difficulty in pushing forward to using better techniques. This is called the stages of supply chain management. Stages of supply chain management are essentially maturity model for the use of a technique.

Stages of supply chain management apply to all the domains, demand planning, supply planning, production planning, etc. Inventory optimization is currently one of the most advanced techniques that can be used. Therefore it represents one of the most advanced stages of supply chain management. Inventory optimization only applies to the supply planning.

Conclusion

The inventory optimization inventory system software is effective for supply planning because it is customized for the most important business goal of many, although certainly not all, supply planning organizations: the minimization of inventory at any level of service. One of MEIO’s major features is the control it gives planners and organizations over the level of service level. Highlighting their flexibility, MEIO applications can also start from an inventory goal and work toward the level of service.

MEIO software can demonstrate the relationship of every possible combination of the level of service level versus inventory investment and can recreate the relationship based on SKU level modeling. This capability replicates the inventory-to-service-levels graphic that is familiar to most supply chain

One of MEIO’s major features is the control it gives planners and organizations over the level of service level. Highlighting their flexibility, MEIO applications can also start from an inventory goal and work toward the level of service. MEIO software can demonstrate the relationship of every possible combination of the level of service level versus inventory investment and can recreate the relationship based on SKU level modeling. This capability replicates the inventory-to-service-levels graphic that is familiar to most supply chain professionals and does so in a way that is very precisely based upon the company’s real data, making MEIO applications very powerful for simulation. In fact, several MEIO applications allow for simulation by planners and do not require any special set-up.

Inventory optimization and its accompanying technology multi-echelon planning are one of the most advanced stages of supply chain management.

Remote Supply Planning Consulting

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Brightwork Explorer for Service Level & Stock Management

Faster and More Straightforward Approach than Inventory Optimization

Inventory optimization started with a bang but failed to live up to the hype that was built up for it. Inventory optimization software is normally overly complex and while the idea is right, successes with inventory optimization are rare.

After seeing many failed inventory optimization projects we developed a simpler and less invasive way of modeling service levels and inventory. The Brightwork Explorer is free to access until it sees “serious usage” and is free for academics and students. Select the image below for more details.

Reference

MEIO Book

What is MEIO?

This book explains the emerging technology of inventory optimization and multi-echelon (MEIO) supply planning. The book takes a complex subject and effectively communicates what MEIO is about in plain English terms. This is the only book currently available that describes MEIO for practitioners, rather for mathematicians or academics.

The Interaction with Service Levels

The this book explains how inventory optimization allows the entire supply plan to be controlled with service levels, and how multi-echelon technology answers the question of where to locate inventory in the supply network.
This is the only book on inventory optimization and multi echelon planning which compares how different best of breed vendors apply MEIO technology to their products. It also explains why this technology is so important for supply planning and why companies should be actively investigating this method.
The book moves smoothly between concepts to screen shots and descriptions of how the screens are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.
Chapters
  • Chapter 1: Introduction
  • Chapter 2: Where Inventory Optimization and Multi-Echelon Planning
  • Fit within the Supply Chain Planning Footprint
  • Chapter 3: Inventory Optimization Explained
  • Chapter 4: Multi-Echelon Planning Explained
  • Chapter 5: How Inventory Optimization and Multi-Echelon Work
  • Together to Optimize the Supply Plan
  • Chapter 6: MEIO Versus Cost Optimization
  • Chapter 7: MEIO and Simulation
  • Chapter 8: MEIO and Service Level Agreements
  • Chapter 9: How MEIO is Different from APS and MRP/DRP
  • Chapter 10: Conclusion
  • References
  • Vendor Acknowledgements and Profiles
  • Author Profile
  • Abbreviations
  • Links in the Book
  • Appendix A: MEIO Visibility and Analytics
  • Appendix B: The History of Development of MEIO Versus MRP/DRP