Supply Chain Management Software – Logility

Multi-Echelon Inventory Optimization and Network Design - Differences?

I find this question comes up a lot as the lines of understanding start to blur the two offerings. 

At the heart of this confusion is the network. Any time you want to optimize across an enterprise, whether it is inventory or product flows, you need to represent a logical representation of the supply chain. This creates a structure that math can be applied to.  In this way the network structure is the ‘bones’ of the supply chain around which the optimization can be performed.  

You have all seen supply chain network representations. They have nodes, each connected to another by arcs. These nodes could be geographic locations, machines, processes, capacity, or more. Arcs can be process flows, transportation lanes, modes of transportation, product flows, or bill of material links. It all depends on what problem you have designed the network to solve.

If you look at the history of applying network models to practical supply chain applications you will see quite different approaches depending on what problems they were originally designed to address. You could say it really depends on ‘what neighborhood they grew up in’. Some solutions were designed to optimize transportation problems. Some were designed to optimize manufacturing operations. A few will look at both distribution and storage needs. 

The way these networks are logically represented colors the level of usefulness they bring to other sets of problems. Models designed for transportation problems typically struggle with manufacturing problems and vice versa.

This brings us full circle to what the difference is between multi-echelon inventory optimization (MEIO) and network design. Network design optimizes the network and uses inventory policy as a constraint.  MEIO optimizes inventory policy (how much and where) to meet service and cost goals using uncertainty within the network constraints.

• Network design solutions were created to solve high-level, aggregate problems. Inventory optimization applications solve a real-world detailed inventory policy and deployment problem.
  • Inventory optimization is a non-linear problem that requires different approaches than the mixed integer / linear programming used in commercial network design applications. 
  • Inventory optimization requires the network to be modeled at the SKU / location level detail. General network design tools use aggregated inventory to solve the problem. 
  • Inventory optimization is a time-phased problem. Your inventory plan has to be in the same cadence as the rest of your planning process. General network design tools aggregate the time horizon into one or a handful of time buckets.
• MEIO does not merely use the network model to propagate inventory constraints. MEIO uses the network constraints plus the uncertainty of supply and demand to optimize the inventory levels and policies. 
• MEIO focuses on the inventory problem, not the transportation or manufacturing problem. Network design tools do not have the same focus on inventory as the strategic driver in their design and application.
• At best a general network approach is going to allow you to define an inventory policy at each node and use that as a constraint for solving the network. This is the tail wagging the dog if you want to optimize inventory policy.

The confusion stems from the fact that both approaches model the supply chain network. In fact anyoptimization that looks at more than one node in your supply chain is going to have some sort of network representation. 

It is how these network representations are designed and applied that makes the difference. Having a network model does not make you automatically able to optimize inventory in that network. The devil truly is in the detail. 

If you are looking for broad, aggregate swags on the inventory positions in your supply chain you may be able to get there with a general network design tool. However, if you want to optimize how inventory strategically drives your business, you need to lean on multi-echelon inventory optimization.

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Do Wholesale Distributors Think in Terms of Supply Chain Optimization?

Not all wholesale distributors think in terms of supply chain optimization—but they should. Faced with growing costs, demanding customers and paper thin margins (net margin is often under 1%), supply chain management often separates successful distribution companies from those that constantly struggle.

Wholesale distributors act as aggregators of demand, buffering manufacturers from small orders and logistics complexity. As consolidators, they represent multiple, sometimes competing suppliers, placing the manufacturer’s inventory closer to consumption for faster delivery, and some provide a local contact for technical product information, repair and customer service. This ensures the right products are ready when and where the customer needs them, and at the right price. In markets where technology, regulation, competition, or fashion trends drive rapid product life cycles, the wholesale distributor often manages product succession as well. 

• For wholesale distributors, inventory presents a challenging balancing act: holding too much wastes resources and risks obsolescence, while stocking too little can drive customers into the arms of your competition. A wholesaler’s network is often more regional than global, and its inventory is predominantly in finished goods, yet the infrastructure is still characteristic of a multi-echelon supply chain, which can be likened to a massive glue trap for working capital. Developing core competency in supply chain optimization techniques such as demand planning, supply planning, replenishment planning, transportation management, and inventory optimization can give a wholesale distributor a competitive edge.

Our recent white paper, Updating the Wholesale Distribution Playbook, takes a step back and re-examines the wholesale distributor’s complex supply chain—where balancing service and inventory costs is critical to the success of the business. The goal is to buy and stock as little inventory as possible, while still meeting all service level goals. Upgrading buyer-centric systems alone won’t drive more profits—a wholesale distributor’s playbook needs to include supply chain optimization techniques such as:

• Forecasting market demand while handling uncertainty
• Formalizing vendor-managed inventory consignment
• Reducing safety stock levels and shifting buffers for maximum efficiency
• Focusing on buying inventory when it’s needed

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Supply Chain Urgency and Economic Fear, Cycles Really

Why are phrases such as “especially in the current economy” so in vogue in everything from analyst research to white papers and presentations? The phrase has become part of our lexicon, but that baffles me because we’re not just in the ‘current economy’—we are moving forward in an ever-changing, global economy.[..]