Reducing inventories in a multi-echelon manufacturing firm: A case study

The effective planning and control of inventories in multi-echelon operations continues to be difficult in modern manufacturing firms. Theoretical models tend to require substantial amounts of data and to make many restrictive assumptions, thus they generally are not often used in practical business situations. On the other hand, the simplistic rules of thumb and the lack of coordination between echelons (levels) typically found in many multi-echelon manufacturing situations frequently lead to excessive inventories both in the firm and throughout the supply chain. This paper presents the experience of the author in helping a firm identify the relative impact of the various determinants of inventories as a means of setting priorities for inventory reduction. The results lead to some interesting generalizations concerning practical ways of managing multi-echelon inventories. The paper first reviews the methods typically used by large multi-national firms to manage multi-echelon operations, and then proceeds to a description of the industrial situation dealt with. The remainder of the paper describes the modeling approach used to estimate inventory behaviour under a variety of inventory reduction initiatives, the results of the study, and several new insights gleaned in the process.