White Paper: Multi-Echelon Inventory Optimization

The optimal deployment of inventory is a vital business function for an enterprise. The well-documented benefits of running a manufacturing, distribution or retailing operation with leaner inventory range from a permanent reduction in working capital to increased sales and higher customer satisfaction. As Forrester Research pointed out, the ability to increase inventory turns is a key differentiator between highly successful and more poorly performing companies.

Managing inventory can be a daunting task for an enterprise with tens of thousands of products that are located in hundreds of locations. The challenge is even greater when the locations are situated in different tiers or echelons of the enterprise's distribution network. In such multi-echelon networks, new product shipments are first stored at a regional or central facility. These central facilities are the internal suppliers to the customerfacing locations. This is a common distribution model for many retail chains as well as for large distributors and manufacturers. For example, a large pharmaceutical wholesaler's distribution network consists of one regional distribution center (RDC) and more than 30 forward distribution centers (DCs). Another national retailer of automotive aftermarket parts and equipment manages more than 25 million Stock-Keeping Units (SKUs) that are spread out across 10 DCs and more than 900 stores. And finally, a global manufacturer/distributor of furniture fittings carries inventory in European DCs located near its factories before shipping the finished goods to 15 local DCs worldwide; these DCs serve end customers.