Optimized Multi-Echelon Inventory Planning

ERP on-board inventory management software offers some inventory management, manufacturing, and purchasing capabilities. However, they are not deep in functionality and do not provide true inventory optimization algorithms. Some do have available multiple location capabilities but again depth and breadth of functionality is limited. Lots of manual work is required to make these systems work as needed.

Advantages of the “multi-echelon” supply chain planning include:

• Consolidating inventory reduces the quantity required
• Consolidating purchasing gives greater leverage to obtain discounts from suppliers
• Balanced stock mix at all locations 

Although very advantageous, multi-echelon planning can bring complications as well. How much of a particular item should be stocked at each location? How should the company support transfers of stock from one location to another? If an item is on short supply, how should it be allocated down from the central warehouse to other locations? How does multi-channel selling (know an omni-channel) to the customer effect the distribution of stock?

Organizations with large inventory operations work with multiple levels of supply. Central sites purchase and stock most of the items. Slow-moving and less important items can be sent quickly to remote sites when needed, while fast-moving items are stored closer to the customer to enable more rapid customer service.

Inventory planning for finished goods has become more complex and costly. The ever-increasing number of new Items (SKUs), changing demand patterns, and increasing transportation costs are taking a toll on the bottom line. Especially difficult is planning items used both in kits and sold separately. Further complexity comes from planning for multiple locations and accounting for substitutes and supersedes.

In this example, we have three locations supplied by a master warehouse, which has a planning horizon of 90 days. It also has a forecast of 90 units for that three-month period for an item.

Through the advanced algorithms in VALOGIX Inventory Planner, we can predict that:

Location 1: will place a replenishment order for 30 units 16 days from now;

Location 2: will place an order for 20 units in 27 days;

Location 3: will place an order for 40 units in 7 days.

It is not just about having visibility and the capability to manually set safety stock and min/max levels for multiple locations. It is about having the right, balanced mix of items at the proper location at the right time. Using inventory optimization to dynamically plan and replenish multiple locations is a much better, proven method. The fact that the optimization process is automated and dynamic, dramatically improves productivity and reaction time to changing demand.

What inventory optimization does is balance the investment in an inventory with the fill-rate (service level) goals of a company across all locations. There are also financial considerations, constraints that can also be applied in the development of the algorithm. These highly complex algorithms work behind the scene so as not to confuse the user or make them fearful of using optimization to help manage their inventory.

We know that you can dramatically improve the effectiveness of the optimization algorithms by adding heuristics into the overall process equation. Heuristic refers to experience-based techniques for problem solving, learning, and discovery. Heuristic methods are used to speed up the process of finding a satisfactory solution, where an exhaustive search is impractical.

So consider the capabilities carefully when planning multiple locations:

Manage - the entire inventory planning process:

• Forecasting & Planning – every item at every location
• Stock Level Setting – considers forecast, lead time, order frequency,
• desired service level and variability in demand
• Replenishment - Purchase Orders, Production Orders, Stock Transfers

Optimize – cost reduction & control - strategic planning analytics

• Easy to use and highly effective
• Avoids disruptions from costly stock-outs
• Exception based – alerts warn of potential future issues
• Planning Groups give unparalleled planning control & flexibility

Time-Phase Plan - all items at all locations simultaneously

• Items used in B.O.M.s and Kits as well as those sold independently
• Back-schedules to cover longest lead time of components
• Considers substitutes and supersedes
• Synchronized planning for smooth-flow inventory availability

From a large Valogix industrial customer:

“We carried high levels of inventory to protect our customers from the instability in our industry. Even with the difficult economy, or perhaps because of it, we committed to Valogix on the spot because of the identifiable financial results through inventory reductions. From what we’ve seen in just three months, we expect Valogix to pay dividends long before the end of the current economic situation.”

Find out yourself, schedule a free product tour with Valogix today!