Multi-echelon is the future of competitive supply chains
Karsten Horn, director of international sales for the inventory and supply chain division at INFORM
Inventory management – the great balancing act
In the current economy, businesses are constantly looking for ways to protect their profit margins. This leads to an inventory management high-wire act; on one hand, consumers demand maximum availability but on the other hand, storing high levels of stock increases costs.
Many businesses opt to store stock across central, regional and local distribution centres to help ensure item availability and offer quick delivery times to consumers. Various risks within supply chains, such as fluctuating demand, results in inventory managers holding safety stock to guarantee availability. However, by holding high levels of stock to protect the network from uncertainty, businesses often have a vast amount of redundant inventories which can have a major impact on the profit margin.
Businesses should not accept this loss of capital as part and parcel of the supply chain, especially when a more strategic approach to inventory management can reduce costs and therefore support competitiveness.
The multi-echelon approach is the best solution for maintaining cost-effective inventory management across multi-level supply chains. This method takes a bird’s eye view of the entire network and optimises the total inventory, rather than looking at each warehouse as a separate entity.
Through considering the entire network, businesses can take into account varying levels of risk as well as warehouse costs to determine whether it is more cost-effective to store stock at the start of the supply chain or closer to the customer. By strategically shifting stock to the optimal location, businesses can reduce uncertainty and thus the requirement for safety stock.
Whereas the relationship between distribution levels is usually largely determined by rigid lead times, multi-echelon optimisation uses lead times as an adaptable variable that can be increased or decreased as required. While the network structure will remain unchanged, the connections between distribution levels become completely flexible. As a result, multi-echelon makes it possible to create and analyse a variety of inventory configurations in order to identify the optimal inventory situation.
At each level of the network there is normally a high requirement for availability as each node is under pressure to deliver to the next level on time. However, the requirement for availability is not constant at every level and thus there is potential for stock shifting.
For example, just imagine if your customer willingly extended the lead time, giving you more time to respond to the order. This would provide greater room to manoeuvre, reducing both uncertainty and the need for safety stock. A multi-echelon achieves similar results through reducing pressure on the supply chain.
By ensuring stock is in the most appropriate location, businesses can hold the minimum amount of stock while still guaranteeing maximum availability. Multi-echelon optimisation inventory can reduce inventory by up to 20 per cent, freeing up capital previously tied up in redundant stock.
In the complex, multi-channel supply chains of today, each customer has different needs. Therefore, flexibility within the network is more essential than ever. In using lead times as an adaptable variable rather than a restriction within the supply chain, multi-echelon makes it possible to create the optimal inventory situation. I believe the age of multi-echelon optimisation is upon us. Therefore it is imperative businesses take steps towards implementing this innovative concept in order maintain a competitive edge.
Biden establishes Supply Chain Disruptions Task Force
The US government is to establish a new body with the express purpose of addressing imbalances and other supply chain concerns highlighted in a review of the sector, ordered by President Joe Biden shortly after his inauguration.
The Supply Chain Disruptions Task Force will “focus on areas where a mismatch between supply and demand has been evident,” the White House said. The division will be headed up by the Secretaries of Commerce, Transportation, and Agriculture, and will focus on housing construction, transportation, agriculture and food, and semiconductors - a drastic shortage of which has hit some of the US economy’s biggest industries in consumer technology and vehicle manufacturing.
“The Task Force will bring the full capacity of the federal government to address near-term supply/demand mismatches. It will convene stakeholders to diagnose problems and surface solutions - large and small, public or private - that could help alleviate bottlenecks and supply constraints,” the White House said.
In late February, President Biden ordered a 100 day review of the supply chain across the key areas of medicine, raw materials and agriculture, the findings of which were released this week. While the COVID-19 health crisis had a deleterious effect on the nation’s supply chain, the published assessment of findings says the root cause runs much deeper. The review concludes that “decades of underinvestment”, alongside public policy choices that favour quarterly results and short-term solutions, have left the system “fragile”.
In response, the administration aims to address four key issues head on, strengthening its position in health and medicine, sustainable and alternative energy, critical mineral mining and processing, and computer chips.
Support domestic production of critical medicines
- A syndicate of public and private entities will jointly work towards manufacturing and onshoring of essential medical suppliers, beginning with a list of 50-100 “critical drugs” defined by the Food and Drug Administration.
- The consortium will be led by the Department of Health and Human Services, which will commit an initial $60m towards the development of a “novel platform technologies to increase domestic manufacturing capacity for API”.
- The aim is to increase domestic production and reduce the reliance upon global supply chains, particularly with regards to medications in short supply.
Secure an end-to-end domestic supply chain for advanced batteries
- The Department of Energy will publish a ‘National Blueprint for Lithium Batteries’, beginning a 10 year plan to "develop a domestic lithium battery supply chain that combats the climate crisis by creating good-paying clean energy jobs across America”.
- The effort will leverage billions in funding “to finance key strategic areas of development and fill deficits in the domestic supply chain capacity”.
Invest in sustainable domestic and international production and processing of critical minerals
- An interdepartmental group will be established by the Department of Interior to identify sites where critical minerals can be produced and processed within US borders. It will collaborate with businesses, states, tribal nations and stockholders to “expand sustainable, responsible critical minerals production and processing in the United States”.
- The group will also identify where regulations may need to be updated to ensure new mining and processing “meets strong standards”.
Partner with industry, allies, and partners to address semiconductor shortages
- The Department of Commerce will increase its partnership with industry to support further investment in R&D and production of semiconductor chips. The White House says its aim will be to “facilitate information flow between semiconductor producers and suppliers and end-users”, improving transparency and data sharing.
- Enhanced relationships with foreign allies, including Japan and South Korea will also be strengthened with the express proposed of increasing chip output, promoting further investment in the sector and “to promote fair semiconductor chip allocations”.