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The Value of Multi-Echelon Models

P.L. Jackson and J.A. Muckstadt

Review of Business and Economic Literature, 2012, vol. 57, issue 3, 339-354

Abstract: We present a rationale for implementing multi-echelon inventory methods by focusing on a business opportunity we call the “curse of variety.†The curse of variety phenomenon, which can be traced to fundamental economics in lot sizing and safety stock, occurs when inventory investment is disproportionately concentrated in items that are slow-moving. The curse is both a drag on efficiency and a vulnerability to market share loss to more focused suppliers. Also, when customer service targets are set at the individual product level, the result will be that each echelon within a distribution network will carry the same range of product to relatively similar levels of depth. We then change the customer service level targets in a way that honors their original intent but permits safety stock inventories to be concentrated in items and locations for greater effectiveness. The result of the change is to reduce the total safety stock investment required by making the distribution of safety stock between echelons complementary rather than duplicative. It also appears as if this change in strategy greatly mitigates the curse of variety, at least with regard to safety stock investment. The rationale is illustrated by means of a simple numerical example.

Date: 2012
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Handle: RePEc:sen:rebelj:v:57:i:3:y:2012:p:339-354