Single vs multi-echelon inventory optimization for retail and wholesale

Inventory management challenges

In our personal experience managing echelons of inventory, organizations are faced with similar challenges of inventory management. The goal is to optimize inventory to drive both operational and strategic performance objectives.

Inventory, of course, can be seen as operating as both a strategic and operational asset. As a strategic asset, inventory can be thought of as an investment or a residual value-building resource. This value is created by the difference between the inventory value and the cost of production, which is typically the sum of the cost of carrying and labor.

However, like all residual asset ownerships, the inventory provides both operational and strategic benefits.

Operational benefits include the opportunity to reallocate costs between operational needs (or those with which I am most familiar) versus strategic or other long-term investments. For example, if you look at an organization where 70% or more of the volume goes to non-core products that have a shelf life of 6 months or less, you can reallocate that 80% of inventory to products that are easier to produce (i.e., lower cost and/or higher value).

On the other hand, as an industry, we all know that companies continually struggle to manage their inventory control. With that said, which optimization strategy would be best for your business? Let’s explore the various types.

Single vs. multi-echelon inventory optimization

Single vs. multi-echelon inventory optimization is about controlling the number of people who enter the company’s inventory. What makes it different is that it is all the same for each person.

There are 3 main types of inventory: single-echelon inventory, multi-echelon inventory, and ecosystem inventory. Multi-echelon inventory and ecosystem inventory are more difficult to control and are typically the types of inventory that have the most difficult and costly inventory control problems. This blog post will show you how to optimize multi-echelon inventory by controlling the number of people entering inventory.

Single-echelon inventory optimization

Single-echelon inventory simply means that customers have access to the inventory as it is being received by the distributor. Customers simply purchase a product and then place the order to take delivery of it at a future time (aka “shipping”). In addition, customers pay for the goods in advance. The product goes into inventory at the warehouse as soon as it is made but the distributors make money the first day that they receive it (aka, “in-stock”).

Multi-echelon inventory optimization

In multi-echelon inventory optimization, you set targets for the number of times the new product should enter inventory in a day for the whole customer base. The goal is to maximize your profit. The goal is not to increase the total number of orders or increase the product’s overall price tag at the end of the day. The goal is to increase your profit by limiting how many times your customers place orders in a day.

You want to avoid sending the product to customers that have placed orders before, after, or during the same day. (If customers place their order before, there is only 1 day for the inventory to build up but if the customer

Deterministic vs. stochastic

You can decide on inventory optimization for your company on a case-by-case basis. Sometimes it is more cost-effective to do some inventory, to sell a part than to order a bigger quantity and then wait until your production line runs out of the inventory. Sometimes, it is cheaper to buy larger quantities of inventory than using the same quantity that was used last year.

If you decide to do all inventory in large quantities, it is easier to predict your end inventory position and you can sell at a higher price. Therefore, it is often more cost-effective to do deterministic inventory optimization for your company than go through the uncertainty of having to reorder.

With stochastic optimization, you need to use a model to simulate your production to forecast the end inventory position. This is where stochastic optimization can help you make the most profit for your money. Then, you just need to use your cost structure to find the optimal inventory solution in your situation.

Still not sure which approach would be best for you? Let’s talk — visit our contact us page or call 888.881.1988.

By POS Highway Staff | July 24th, 2023 | Point of Sale | 0 Comments

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