Executive Briefings

Network Design and Multi-echelon Inventory Optimization

Inventory has been and continues to be the lifeblood of supply chains. Properly managed, it drives revenue and efficiency for companies. But as the nature of supply chains changes, so must the policies used to manage inventory. Traditional inventory management practices are being made obsolete by increasing global supply chains and contract manufacturing, more dynamic product life cycles, and multi-channel distribution. Two specific technologies--network design and inventory optimization--are new, more promising approaches.

Despite globalization and dynamic customer requirements, half of all companies are looking at their network design only once every two to five years in part because of the lack of adequate technology tools and associated processes. Best-in-class companies are more likely than their peers to maximize the use of network design technology. These companies are increasingly using network design beyond just identifying where to build facilities and warehouses. They have started thinking about where and how much inventory to place, along with how to redesign distribution networks to mitigate transportation time, cost and capacity constraints.

Aberdeen research finds that companies have been slowly but steadily moving toward more advanced inventory optimization techniques like multi-echelon inventory optimization. Today, 20 percent of companies report using multi-echelon techniques compared to 12 percent of companies in 2004. And 29 percent of large companies say that they are using this approach. Best-in-class companies are more than twice as likely than other companies to use multi-echelon techniques.

However, the use of multi-echelon approaches is still maturing. In fact, around 40 percent of the companies that report using multi-echelon tools are, in fact, not taking a pure multi-echelon optimization approach. Instead, they are setting customer service levels for each level in the supply chain and separately calculating the inventories rather than obtaining the inventory based on global cost and service-related calculations.
http://www.aberdeen.com

Inventory has been and continues to be the lifeblood of supply chains. Properly managed, it drives revenue and efficiency for companies. But as the nature of supply chains changes, so must the policies used to manage inventory. Traditional inventory management practices are being made obsolete by increasing global supply chains and contract manufacturing, more dynamic product life cycles, and multi-channel distribution. Two specific technologies--network design and inventory optimization--are new, more promising approaches.

Despite globalization and dynamic customer requirements, half of all companies are looking at their network design only once every two to five years in part because of the lack of adequate technology tools and associated processes. Best-in-class companies are more likely than their peers to maximize the use of network design technology. These companies are increasingly using network design beyond just identifying where to build facilities and warehouses. They have started thinking about where and how much inventory to place, along with how to redesign distribution networks to mitigate transportation time, cost and capacity constraints.

Aberdeen research finds that companies have been slowly but steadily moving toward more advanced inventory optimization techniques like multi-echelon inventory optimization. Today, 20 percent of companies report using multi-echelon techniques compared to 12 percent of companies in 2004. And 29 percent of large companies say that they are using this approach. Best-in-class companies are more than twice as likely than other companies to use multi-echelon techniques.

However, the use of multi-echelon approaches is still maturing. In fact, around 40 percent of the companies that report using multi-echelon tools are, in fact, not taking a pure multi-echelon optimization approach. Instead, they are setting customer service levels for each level in the supply chain and separately calculating the inventories rather than obtaining the inventory based on global cost and service-related calculations.
http://www.aberdeen.com