Executive summary – Despite the increasing pressure to reduce working capital across many industries, many multinationals still optimize their inventory in the end-to-end supply chain in siloes. This leaves room for improving costs, customer service, and working capital. This article explains the concept of multi-echelon inventory optimization and how to successfully implement it in your organization, along with best practices and lessons learned from a real-life MEIO implementation in the CPG industry.

This article was published in the Journal of Business Forecasting | Volume 42 | Issue 4 | Winter 2023-2024.

Efficient inventory management is crucial for any business. While inventory is needed to meet customer service levels and mitigate uncertainties, organizations often struggle to balance customer service levels, inventory costs, and cash tied up in inventory. This challenge becomes even more complex when dealing with multi-echelon supply chains, where decisions are interrelated, and material availability downstream depends on material and resource availability upstream. A methodology that can be applied to tackle these challenges is termed Multi-Echelon Inventory Optimization (MEIO). In this article, we explore the concept of MEIO and its driving forces, its benefits, and how to successfully implement it in your organization to achieve higher levels of efficiency and profitability.

What is multi-echelon inventory optimization?

MEIO takes a holistic view of inventory management across multiple echelons (levels) within a supply chain. Traditionally, organizations have focused on optimizing inventories at each location, leading to suboptimal results and excess inventory in the system as a whole. Common reasons for excess inventory include lack of data visibility across the supply chain, lack of policy parameter revisions in organically-grown supply chains, and lack of expertise in right-sizing inventories in an integrated way.

MEIO takes a more integrated and comprehensive approach, optimizing inventory decisions across the entire supply chain rather than in siloes. Such a holistic view avoids inventory buffer duplication while ensuring high customer service levels. This is achieved by setting goals to meet the target service level of the end customer, modeling interactions between different echelons and locations, and accounting for various effects such as demand and lead time uncertainties.

What key forces drive the trade-offs in MEIO?

Click here to continue reading the full article. 

Curious to explore possibilities for MEIO in your organization? Reach out to one of our inventory experts today!  

The post Optimizing inventory in siloes? Unlock the power of Multi-Echelon Inventory Optimization appeared first on EyeOn.

Waste is inherent to today’s supply chains, especially in the food industry, so much that 6% of all greenhouse gas emissions come from food losses and waste. At the same time, corporations and countries pledge to lower their emissions, but they still need to find solutions to materialize the reduction. Waste hierarchies were developed to solve this. To minimize the impact of waste, they present guidelines as to which waste alternative use to prioritise. 

Waste hierarchies are a good first step to implementing environmental awareness in E&O management. However, the guidelines are not always efficient and lack clear industry-specific implementations, leading to a focus on the wrong alternatives and unrealized emission savings. Therefore, I, Matthieu de Terwangne Master’s student in Sustainable management and Technology, decided to investigate a concrete case study and create a standard methodology to improve this process.

Methodology

In this thesis, we created a methodology to use as a guideline to assess the efficiency of waste hierarchies in terms of greenhouse gas emissions and costs. It consists of three main steps. 

The first step involves gathering and analyzing all accessible data on waste production. This includes obtaining information on stock levels, composition, obsolescence or expiry systems of products, and the current waste management strategy. The data is cleaned and analyzed to provide a clear view of the waste situation. 

The second step focuses on defining when a product enters the waste cycle and identifying different potential uses for waste products. This step helps in categorizing waste management alternatives and choosing the best option based on environmental impact and other factors. The methodology emphasizes the importance of considering the demand for the converted product originating from waste if applicable. 

The third step is the cornerstone of the quantitative analysis. It involves conducting a life cycle assessment (LCA) to quantify the environmental impact of waste management alternatives. The LCA considers factors such as greenhouse gas emissions and costs associated with each alternative. The methodology highlights the need to consider the climate change mitigation potential of alternatives and choose the best option accordingly. 

Throughout the methodology, there is an emphasis on the accessibility and feasibility of waste hierarchies. The documentation on how to carry out a LCA is easily accessible, making the process simpler. The methodology also encourages exploring new alternatives and verifying their impact, rather than solely focusing on existing waste management practices. 

Overall, this methodology provides a systematic approach for companies to assess the efficiency of waste hierarchies in reducing greenhouse gas emissions and costs. It offers a framework for decision-making, highlights the importance of considering environmental impact and explores new alternatives in waste management strategies. 

Case study: waste hierarchy in practice 

Using the methodology, a case study was conducted on Company P, a Dutch company in the frozen food industry, aiming to analyse and improve its waste management strategy in terms of greenhouse gas (GHG) emissions. The study was conducted using a waste hierarchy approach, specifically Moerman’s ladder, to categorize waste products and identify the most environmentally friendly alternatives. 

The first step of the case study involved analysing the available data on stock, demand levels, and waste status of each stock-keeping unit (SKU). The waste data revealed that a significant amount of waste was generated during the COVID-19 pandemic due to order cancellations and disruptions in the supply chain. The waste was categorized into different alternatives, including human food repackaging, animal feed, fermentation, prevention, and dumping. The analysis showed that the majority of waste, around 812 kg over four years, was repackaged into human food. The second-largest waste channel was animal feed, accounting for 312 kg of waste. The remaining waste was allocated to fermentation, prevention, and dumping. 

The second step of the case study involved conducting a life cycle assessment (LCA) to quantify the environmental impact of waste management alternatives. The LCA considered factors such as GHG emissions and costs associated with each alternative. The results indicated that waste hierarchies, when implemented properly, can significantly reduce GHG emissions.

Based on the findings, we recommend implementing waste hierarchies as a first step in improving waste management practices. It also emphasized the importance of considering the demand for converted products and the potential double use of waste hierarchies. Additionally, the study highlighted the need for ongoing monitoring and analysis to improve waste management strategies. 

Overall, the case study on Company P demonstrated the effectiveness of waste hierarchies in reducing GHG emissions and provided valuable insights for companies in the processed potato products industry and beyond to optimize their waste management practices.

Better forecasting, E&O management 

In summary, the key takeaway for supply chain managers is to prioritize waste management as an integral part of their sustainability efforts. By implementing waste hierarchies, quantifying environmental impact, adapting to company and industry needs, considering economies of scale, and continuously improving waste management practices, supply chain managers can drive positive environmental change and achieve sustainable supply chain operations. 

If you’re interested in learning more about these findings, and their practical implications or want to engage in further discussions, feel free to contact one of our experts. 

The post Minimized CO2 emissions due to the waste hierarchy framework appeared first on EyeOn.

The state-of-the-art powerful solution successfully tackling these challenges is termed Multi-Echelon Inventory Optimization (MEIO). In this blog post, we will explore the concept of MEIO and its driving forces, its benefits, and how to successfully implement it in your organization to achieve higher levels of efficiency and profitability.

Understanding Multi-Echelon Inventory Optimization  

MEIO takes a holistic view of inventory management across multiple echelons (levels) within a supply chain. Traditionally, organizations have focused on optimizing inventories at each location, leading to suboptimal results and excess inventory in the system as a whole. Common reasons for excess inventory include lack of data visibility across the supply chain, lack of policy parameter revisions in organically-grown supply chains, and lack of expertise to right-size the inventories in an integrated way.  

MEIO takes a more integrated and comprehensive approach, optimizing inventory decisions across the entire supply chain network rather than in siloes. Such a holistic view avoids inventory buffer duplication while ensuring product availability. This is achieved by setting the goal to meet the target service level of the end customer, modelling interactions between different echelons and locations, and accounting for various effects such as demand and lead time uncertainties.  

Multi-echelon inventory optimization offers significant benefits to your business. It helps increase customer service levels and optimize or rebalance inventory across the entire supply chain, reducing holding costs and efficient use of resources. Your business can free up working capital and reduce carrying costs by eliminating excess inventory.

The benefits of MEIO, however, go beyond merely adjusting stock to match service: it increases the overall supply chain operational efficiency and responsiveness by streamlining inventory-related processes; finally, MEIO provides valuable insights into supply chain dynamics and helps to identify areas for improvement, which leads to better planning also on the strategic level. It is not uncommon to see an MEIO project triggering discussions on strategic topics such as customer service offerings (service level differentiation) or network redesign. 

The four key forces of MEIO  

When it concerns the positioning of safety stocks across a multi-echelon supply chain, a significant trade-off is holding safety stock buffers upstream vs. downstream (close to the end customer). We observe four primary effects which impact the positioning in opposite directions. The first (last) two increase the tendency to hold safety stock upstream (downstream):  

• Demand pooling effect: centralizing safety stocks upstream to mitigate uncertainties for multiple products or at multiple locations with the same safety stock.  
• Value effect: inventory carrying costs usually are lower upstream.  
• Lead time pooling effect: consolidation of safety stock at a downstream location that also covers for lead time and variability of its upstream location(s)   
• Service level effect: downstream buffering is preferred if service levels are differentiated. 

Read our related blog: How ‘reinforcement learning’ can solve your inventory challenges

The EyeOn unique approach to MEIO: from black box to glass box  

At EyeOn, we have developed a powerful and unique approach for MEIO, combining cutting-edge analytical techniques with extensive business know-how. We help our customers right-size their inventory levels rather than reducing them. This is why we start every project by identifying the business question of our customers, which leads to defining the right objective for the study.  

After the data collection and validation phases, we perform a quick win analysis to derive actionable insights, harvest ‘low-hanging fruit,’ and set the baseline for our MEIO model. Our simulation-based optimization framework enables us to tackle real-world complexity, such as total container shipments, limited capacity, minimum order quantities, etc.

We build and validate the model together with the customer during multiple touchpoints, thereby building trust in it. We gradually increase the modeling complexity and build the planners’ understanding of the safety stock drivers and the root causes for the gaps between the current and optimal performance. The stock optimization phase is followed by a scenario analysis phase, where we test different scenarios to provide decision support.

Finally, we facilitate implementation by segmenting the customer’s portfolio through a simple decision tree based on SKU characteristics, which reduces the burden of individually assessing each SKU and eases policy parameter settings for new SKUs.  

After a successful project, we sustain our solution by means of such a decision tree or by offering a recurring periodical service for keeping the safety stock parameters up to date.  

MEIO is a powerful tool for businesses looking to right-size their inventory across multiple echelons within the supply chain and go beyond basic textbook modeling and silo-thinking. By taking a holistic approach and leveraging data-driven insights, organizations can balance customer service, inventory costs, and cash. With EyeOn MEIO, you can optimize your safety stock levels in a one-off exercise, sustain the solution for a long time, increase your planners’ understanding of the supply chain dynamics, and take ultimate control of your stock value.  

Curious to explore possibilities for MEIO in your organization? Reach out to one of our inventory experts today!  

The post Unlocking the power of multi-echelon inventory optimization appeared first on EyeOn.

3-minute read 

Dear supply chain and inventory managers: the pressure is on! Inventory levels have reached an all-time high while, fed by high inflation rates, markets are slowing down, and the demand volume and mix is changing. Inventories contain high buffers for supply risks whilst supply tends to become more reliable. High utilization rates keep warehousing costs at a high level and rising interest rates further increase inventory holding costs. And it’s not over yet: inflation rates are decreasing, but it is expected to be at the target 2% inflation rate in 2025 only and interest rates are not expected to decrease soon. It’s time to reduce unnecessary inventory buffers and replace them with buffers necessary to realize your customer service levels agreements. It’s time to right-size your inventory.

Inventory reduction: where to start?

There are three ways to reduce inventory:

• increase demand
• slow down or stop replenishment
• scrap unnecessary inventory

Increasing demand is of course the preferred option, but it can be challenging in the current markets. Scrapping inventory is a last resort, it’s typically the most costly option.
The most natural way to reduce inventory is by slowing down or stopping the replenishment of unnecessary inventory.

This journey starts with making snapshots of your inventory health. The best practice is to use an inventory entitlement framework that breaks down your inventory into pieces based on their stock drivers, e.g. safety stock (service levels, demand- and supply variability) and cycle stock (replenishment frequencies, batch sizes). This breakdown makes a split between the inventory you are entitled to have, and the part that can be denoted slow moving and obsolete stock. You can directly slow down or stop the replenishment of items that have slow-moving or obsolete stock.

Next, the focus should be on right-sizing your inventory by adjusting the replenishment parameters like safety stocks, reorder points, and/or replenishment quantities. Reducing the target safety and cycle stocks will further help to decrease your inventory. But be aware, if not done properly it can significantly reduce customer service and it might further inject the bullwhip effect.

In the longer term, the big question is of course: How has your inventory reached such a high level? Is it just bad luck or can we pinpoint a structural cause? Inventory is the result of mismatches between supply and demand and depends on the quality of your inventory management process. Supporting tools to determine your inventory health and optimal replenishment parameters are a necessity, especially in these times when the demand volume and mix change almost every day.

Inventory right-sizing: Time for action!

A new year has started, and it’s time to think about structural improvements to your inventory management process.

• Does your inventory management process have the right maturity level?
• Is there a lack of (easy-to-use and understand) decision support software?

We can kick-start your journey by bringing in our tools, expertise and benchmarks, for example:

• Our inventory maturity self-assessment: Want to learn more about the maturity of your inventory management process compared to industry peers? Do a free self-assessment to determine gaps or advantages relative to your competition.
• Our data scientists can help you swiftly gain insights into your inventory health and support you in optimizing replenishment parameters using multi-echelon inventory models.
• Our web-based self-service software solution EyeOn Stock offers you a quick and easy way to calculate inventory health and optimal stocking parameters. Learn more or get in touch with us for additional information or a free demo.

Want to learn more about inventory optimization? Explore our website or reach out to our expert Maarten Driessen. Let’s solve your inventory challenges!

Remember to keep an eye on this page where we will address further supply chain challenges you will be facing this year.

The post Working capital optimization: the pressure is on! appeared first on EyeOn.

Learn how to optimize your inventory and balance your safety stocks across the supply chain network, and meet your target service levels without piling up unnecessary safety stock.

Explore our website to learn more or contact our experts!

The post Balance safety stocks with multi-echelon inventory optimization appeared first on EyeOn.

Over the last three years, companies have been hit by a big supply chain crisis. Most companies experienced (or are still experiencing) high demand and supply fluctuations. All this has put enormous pressure on supply chain organizations to increase inventory levels to maintain high customer service. Stock levels are at an all-time high due to companies’ start-stop production strategies of the last two years and the bullwhip effect it has caused. In times of high inflation, which causes rising interest rates and will likely lead to a slump in demand, the bullwhip effect is waiting for its next turn to hit supply chains.

Having in mind the mistakes many companies have made after the financial crisis in 2008 and COVID-19 in 2020, it is key now to not make the same mistakes again. Inventory reductions are needed – but don’t do it rigorously, do it smart! In this blog, we’ll explain what (not) to do in the short term and how to effectively deal with the bullwhip in the long run.

Seemingly effective short-term actions to reduce inventory that turn out to be a slippery slope

When being under pressure to reduce inventory, one thing that companies often do is lower the safety stock levels for all products. It is an easy-to-implement action and it has a direct effect since replenishments for the short term are postponed and inventory will drop accordingly. Don’t do it! It will lead to lower service levels – amplified by the demand and supply uncertainty that most companies currently face – and a further increase of the bullwhip in the supply chain, with all its well-known consequences.

Another easy-to-implement reduction of inventory can be achieved by reducing the portfolio, for example by creating an ABC-XYZ portfolio categorization and then stopping to supply products with a low margin and a high demand volatility (CZ). Although many companies have complex portfolios, it should not crash actions to rationalize. A lot of companies, especially one-stop-shop companies, own their right to exist by being able to deliver all products. Hence, by lowering service levels for C-products the margin on high runners (A-items) might be negatively impacted too.

Truly effective short-term actions to reduce inventory during supply chain crisis

A bottom-up analysis of your product portfolio, customer service offering, and supply chain dynamics will help you detect the inefficiencies in your supply chain without negatively impacting customer service. We’ve supported a lot of inventory reduction programs and typically concluded that 50% of the inventory reduction potential are quick wins, for example:

• Reduce lead times: Companies often adhere to lead times in their master data, which were put in there by planners a long time ago and do not reflect current supplier agreements (i.e. safety and cycle stocks can be reduced).
• Reduce lot sizes: If demand slows down, capacity becomes available. When inventories are getting more expensive, smaller lot sizes than what we have been used to, are a logical consequence.
• Rebalance inventory: Companies with multiple inventory locations can often solve understock of a product in one location with overstock at another location, of course considering the costs of rebalancing.
• Remove duplicate safety stocks: In multi-echelon supply chains, companies often keep safety stock at consecutive stages of the supply chain. Usually, the analysis shows that keeping (a lower) safety stock at one of the locations is possible.
• Differentiate service levels: Smart differentiation of service levels over the product portfolio can help to reduce the total safety stock whilst increasing the total customer service level, of course, considering the importance of the product in the total customer service offering.

Effective ways to reduce the negative impact of the bullwhip

In the long run, the best way to mitigate the negative effects of the bullwhip is by focusing on more sustained actions.
The most resilient supply chain is a short supply chain: Reduce lead times by reshoring, near-shoring, and regionalizing. Other than that, here are the main three actions you can take to confidently handle supply and demand fluctuations:

Improve forecasting: Combine baseline statistical forecasts (time series) with driver-based forecasts (events), and share this forecast throughout the entire supply chain.

Reduce lead times: Lead times consist of psychical delays and information delays. Information delays can be reduced via improved communication technologies (EDI) and by creating end-to-end supply chain visibility and planning; Exchange true demand data with supply chain partners and utilize this to set up a collaborative ‘planning and forecasting agreement’ or, if you want to go one step further, a ‘vendor managed inventory contract’, to utilize the supplier’s economies of scale (not to only offload inventories to another balance sheet!).

Create ‘flow’ in the supply chain, i.e. reduce batch sizes: A reduction of set-up, order, and handling costs will lead to lower (optimal) replenishment batch sizes and in that way reduces the bullwhip effect.

Moving from words to action

Nice words, but many supply chain managers need to reach their inventory reduction target towards the end of this year already. EyeOn can help to swiftly get insights into quick wins utilizing our state-of-the-art forecasting and inventory models.
Reach out to us to learn about our approaches. Let’s solve your inventory challenges together!

The post Master the ups and downs of the current and future supply chain crisis appeared first on EyeOn.

Work smarter, not harder – with reinforcement learning in inventory management

The traditional way to solve this problem would be by using approximations, heuristics, or simulation. We say this is a challenge for machine learning!

Reinforcement learning is a branch of machine learning that trains the computer to make the right decisions. In the beginning, the accuracy is low but as you keep training the results get better. Imagine you are training a dog to bark when a stranger is approaching by giving it a treat when it does it correctly and telling it off when it barks at a friend. With time it learns to identify when to do what.

Reinforcement learning solves your inventory management challenge by finding the most cost-effective policy. This way, you don’t need to evaluate all the policies, saving you time and effort. With reinforcement learning, you can solve complex inventory problems, and yet maintain an interpretable solution and simple decision rules. It can handle not only constant but also changing demand patterns, a major advantage in today’s volatile environment!

We get your business years ahead

To enrich the offering to our customers, we at EyeOn explore and apply the latest methodologies and techniques. The project of our intern Floor van Helsdingen is the perfect example: Floor successfully applied reinforcement learning to a complex inventory problem of one central depot supplying multiple local customer-serving depots. There is hardly a hotter topic these days than machine learning, and we have demonstrated its potential for inventory challenges.

Next to classical reinforcement learning methods, we are exploring deep reinforcement learning. With this innovative method, based on artificial neural networks, we will be able to achieve even better solutions and handle even larger product portfolios.

Curious if reinforcement learning can help optimize inventories in your business as well? Reach out to our experts Maarten Driessen or Dina Smirnov!

The post How reinforcement learning solves inventory management challenges appeared first on EyeOn.

When it comes to production planning, the need for balancing flexibility and stability is crucial in a wide range of industries. On the one hand, companies strive to remain flexible in order to match customer demand. On the other hand, there is a need for the leveling of production to create stability and operate efficiently. Often, manufacturers apply batch logic for their planning. It is, however, possible to step towards leveled production and to produce in line with customer demand at the same time. This simultaneously creates the stability essential in driving a virtuous circle of standard work, continuous improvement and increased performance. Production wheels can be used to realize this.

A production wheel is a method to schedule the production in a regularly repeating sequence. By integrating demand over a certain period of time and leveling production in this time period, a production wheel aims to balance the need for flexibility and the need for efficiency.

Two-step method for designing optimal production wheels

Existing methods for designing production wheels are often suboptimal and rely on manual judgement. The method developed by EyeOn, however, applies analytical models for the design and optimization of production wheels. The method consists of the following two steps:

1. Allocate all products to dedicated production lines or machines based on changeover costs. A ‘randomized variable neighborhood search’ is applied to find a good solution to this problem.
2. Develop a repeating, cyclical production plan for each production line or machine. By balancing inventory costs and changeover costs, a genetic algorithm finds high-quality production wheels.

Case study: Applying the EyeOn production wheel method in a large multinational (process industry)

We performed a case study to test the proposed methodology for designing production wheels. In a production setting with multiple machines and a broad product mix, we proved that the proposed models perform well in designing a cost-efficient production wheel. Our method decreased the quarterly costs by 10.0% compared to an earlier customized production wheel developed by EyeOn and by 39.5% in comparison with the existing production plan of the company in question.

Balancing inventory and changeover costs is key in designing production wheels. By decreasing batch sizes, the proposed method finds a better balance than the benchmark production plans. A production plan with smaller batches and more changeovers leads to higher costs of changeovers but greatly reduces inventory costs (see figure). In the end, this results in significantly lower total costs.

Conclusion

Production wheels enable you to create stability and regularity while remaining flexible towards your customers. But developing production wheels can be a complex task. Simple heuristics with manual judgements are only a first step towards a high-quality production plan. Therefore we developed this new analytical approach using optimization algorithms to best support you in developing production wheels.

For more information feel free to contact us or reach out to Dan Roozemond directly!

The post Balance flexibility and stability in your production processes appeared first on EyeOn.

Check out our upcoming events.

The post Webinar ‘Effective dashboards that improve decision making’ appeared first on EyeOn.

A backorder is an order for a good or service that cannot be filled at the current time due to a lack of available supply. The item may not be held in the company’s available inventory but could still be in production, or the company may need to manufacture more of that product.

Advantages of having backorders

• It reduces costs: As a beginner retailer, you should avoid overstocking products as they are not direct cash. For instance, by setting a target service level of 80% it is clear that 20% of demand will be intentionally back-ordered in order to save on inventory expenses. When focusing on back-ordering there is no need to pay for any extra storage space, because whatever is getting in, consumers have already bought it and this directly cuts costs.

• It shows the customer pattern: Back-ordering tells us a lot about consumer behavior and how they perceive the product. When customers continue to submit orders even though products are out-of-stock, you can look into the statistics and analyze how much stock you need in the future.

Disadvantages of having backorders

However, back-ordering can bring some disadvantages with it. In the picture below it is shown that customers have two options when their order cannot be immediately satisfied:

Not having enough products in stock can cause:

• Loss of competitive edge: Your loyal customers can decide to buy from your competitors because they have the product in inventory, while you are out of stock.
• Customer frustration: Customers may decide to wait until you deliver them the right product or they might get a similar product that you have in stock. But, they will leave with disappointment and frustration.

Here are a few steps to follow to reduce your backorders and prevent losing customer loyalty and revenue:

1. Get real-time data on your inventory levels: The first step to avoid backorders is to have a system that accurately tracks warehouse inventory levels and generates real-time alerts. You should discover the inventory run-out with no delay.
2. Forecast your demand: Collecting data on your historical sales and forecasting future demand helps to keep the right amount of products in your inventory.
3. Create a list of potential reasons for backorders: Investigate “why” there could be a backorder in your system. The reasons could be for example:
   a. Supply capacity: The company does not have enough capacity to internally/externally supply that product.
   b. Quality issue: There’s a product or raw material issue that prevents the order from being satisfied.
   c. Logistics: The demand is unsatisfied due to transportation issues.
   d. Obsolete product: The customer ordered a product that is not being produced anymore.
   The list of what elements can create backorders might differ according to the type of business.
4. Create insights: Once you have accurate data and each backorder is assigned to a reason code it’s time to create insights and break down the problem. Creating visuals is a guide to finding and solving the weaknesses that are causing backorders. Additionally, it is a way to monitor how the backorder trend is progressing in time.

In supply chain management it is hard to imagine how you can be effective at inventory management and customer satisfaction without a strong grasp of your underlying backorder KPIs. A dashboard provides an at-a-glance window into your business performance and enables you to manage all those orders of out-of-stock products. Learn more about dashboarding!

Curious how we turn your data into actionable insights? Our powerful visualizations will turn your data into actionable insights that facilitate both planners and managers to focus and make high-quality decisions, faster. Do you make data-driven decisions with confidence? If not (yet), please get in touch with our specialists to see how we can support you.

The post What is a backorder and how can it be reduced? appeared first on EyeOn.