Assessing Inventory Risk With a Multi-Echelon Inventory Optimization System

There are a multitude of issues that can affect a supply chain’s inventory. Anything from supplier issues, faulty machines, transportation issues or inaccurate forecasts can affect inventory, resulting in shortages or excesses of inventory.  Inventory management systems must achieve your organization’s required service levels, while keeping inventory costs as low as possible in fast-changing economic conditions, high demand uncertainty and shorter product life cycles.

Today’s advanced Multi-Echelon Inventory Optimization (MEIO) systems are intelligent enough to be used for supply chain risk management.   MEIO systems look at inventory holistically and can help decide the best approach, taking customer service into consideration. Forecast streams, incremental costs, revenue factors, service impact, etc. can all be dynamically modeled in a MEIO system, allowing an organization to review supply chain planning decisions based on their financial impact.  It has the capability to model different layers of supply chain, take randomness into account at every stage, look at the cost and service level requirements, and then decide how much of what needs to be kept at every critical point of the supply chain.  With an MEIO system, you have the opportunity to re-design your inventory plan on weekly or monthly basis so that your supply chain can withstand new conditions.

This technology can make it a lot easier to mitigate inventory risk. An MEIO system with supply chain risk management capabilities would be most useful in assessing the more frequent risks, causing the infamous inventory seesaw effects, rather than risks that may occur less frequently.

Benefits of an MEIO system can include:

  • Reduced inventory  up to 30%
  • Freed working capital from unnecessary inventory  buffers
  • Increased inventory turns
  • Reduced inventory carrying costs
  • Lowered obsolescence rates
  • Increased customer service performance

Risk assessment can never be too accurate.  A Multi-Echelon Inventory Optimization system may be your best tool in simulating, assessing, and mitigating risk factors, and their full impact on your supply chain.