The Efficient Frontier: Boldly Going Where Few Supply Chains Have Gone Before

Get out a piece of graph paper and plot your current achieved service level on the x-axis and your current inventory level on the y-axis. Mark that point with a dot.Now, estimate how much more inventory on hand would be required to raise your service level by 5%, 10%, 15%, and so on. Now, go in the opposite direction and plot how much less inventory would be required if you lowered your service level goal by those percentages? Congratulations, you now have a bunch of dots on graph paper.
Connecting these dots draws a trade-off curve between your currently achievable service levels and the corresponding inventory necessary to achieve them. Spend more on inventory and you should be able to increase your service level. Drop your service level goal and you should be able to save some working capital by reducing inventory. That trade-off curve is called your Efficient Frontier. Organizations can slide along this efficient frontier curve by manipulating the service and inventory “levers.”

So, an efficient frontier is like reality: you can move along it, but you can’t alter it. Or can you?

Multi-echelon inventory optimization (MEIO) lets you step into new territory, a new efficient frontier, that establishes a previously unavailable relationship between inventory and service level. In fact, you could say that any MEIO initiative is an attempt to alter reality: in this case, inventory reality. You want to jump off your current curve onto a whole new curve that represents a truly better world. In this new world, less inventory is required to produce higher service levels than you’ve been able to achieve in the past.

By modeling the end-to-end supply chain, MEIO determines new ways in which inventory pools at each stage, or location, should be managed to best serve the needs of other stakeholders occupying other supply chain tiers. MEIO initiatives discover the optimum amount and placement of inventory across the entire interdependent network.

Planners can use “what-if” scenario analyses to adjust the tradeoff between customer service and inventory cost over time to perfectly match the risk profile your organization is comfortable with.

With its uniquely comprehensive approach to both strategic and tactical inventory held across the supply chain, MEIO creates better trade-off curves. These new realities mean the supply chain team delivers higher levels of service at lower inventory cost for any cost vs. service goal. This creates a positive feedback loop that drives continuous improvement for years.

By shifting the efficient frontier, I have seen companies reduce their working capital more than 30 percent, translating into tens of millions of dollars in savings annually.

How good is life on the frontier in your supply chain? Are you ready to boldly go where few supply chains have been before?