Key Principles of Multi-Echelon Optimization (MEO)

Service Parts Inventory Optimization - Goal Get the highest service return from every dollar invested in inventory Determine optimal service part stocking levels Create stocking plan to support service contracts Honor business rules and practical constraints Create a stable plan Build a realistic model of the connected supply chain to reduce plan vs. actual mismatch : Demand is difficult to predict, repair yields are uncertain, procurement lead times are long : multilevel supply chains, forward and reverse flows : high part variety, dynamically adjusting plans, last time buys

Exchange Curve $270M $ Inventory Service Level

Value Creation in Multi-echelon Optimization MEO can generate 20-30% in inventory savings on top of item based planning due to following six value generating principles: Accurate Modeling of the Supply Chain Part Mix Optimization Multi-Echelon Optimization Prevent Churn and Minimize New buy Incorporate Business Rules in Optimization Business Focused Service Targeting

1. Accurate Modeling of the Supply Chain Value Creation in MEO 1. Accurate Modeling of the Supply Chain Forecast Mean and Variance Roll up in Supply Chain MEO accurately rolls up forecast mean and variances in the supply chain Accurate Estimate of Lead time MEO accurately models the repair, return and new buy lead times, incorporating NFFRate, ReturnWashRate, RepairWashRate MEO predicts the delay caused by backorders at parent locations when replenishing child locations. Therefore the “Effective Lead time” at a child location includes the replenishment lead time plus the backorder delay time from replenishment parent. Accurate probability distributions to estimate service Poisson, Negative Binomial or Normal distribution are used to model the pipeline accurately. In the absence of accurate models service cannot be predicted. This causes misalignment of inventory, and users resort to “over targeting” and ad hoc “padding”.

Value creation in MEO 2. Part Mix Optimization Differentiated Service: MEO uses service targets by service groups and finds the optimal service level for each pair based on cost, lead time, variability, and minimum service needs (SKU constraints) to make the best use of inventory investment. Optimal ASL Decision: MEO makes the optimal ASL decisions based on cost-service trade-off. Users can also influence it using SKU constraints to stock or not stock specific pairs. Reduced Rounding Errors: MEO analyzes discrete inventory decisions for cost-service trade-off ensuring the best use of money tied in inventory. So errors introduced by rounding are reduced.

Value creation in MEO 3. Multi-Echelon Optimization MEO takes advantage of coordinated stocking between parent and child locations maximizing asset productivity. This prevents duplication of safety stocks in the supply chain. By combining location and network fill rate targets in service group, MEO can ensure that each location meets a minimum service, but the group of locations together achieve a higher target. As a result inventory is optimally allocated to locations where they meet the maximum demand. 4. Prevent Churn and Minimize New buy MEO churn control makes the best use of existing inventory without sacrificing the optimality of solution Respect Production feature prevents inventory churn from one new scenario from production stock levels. Approval workflow through review filter is another way for planners to control churn .

Value Creation in MEO 5. Incorporate Business Rules in Optimization MEO incorporates a wide variety of pair level business constraints (SKU Constraints) in optimization. This ensures that business needs and exceptions are met with minimum impact on inventory investment. 6. Business Focused Service Targeting By using service groups, users can directly reflect their business needs in service targets rather than figuring out pair level service targets. By using scenarios, users can easily compare the inventory impact of different service strategies and select the most appropriate one. 100K$ 120K$ 98% 95% 90% 20M$% 250K$ 85% 15M