Multi-echelon Supply Chain refers to supply chains that are made by multiple stocking points, usually with different items for each one. Each stage of a supply chain is called echelon.
Supply chains with only one echelon is called a single echelon. When we are referring to one that has more than one echelon, we called it a multi-echelon supply chain.
But first, let’s understand how a supply chain is structured so we can discuss multi-echelon further.
Supply Chain Topology
A supply chain network is composed by nodes and edges. Each node represents a possible stocking point on the network, while each edge symbolizes relations between two nodes, or customers and suppliers.
Some examples of nodes are the supplier itself, the production facility, a regional hub, distribution centers and clients.
We can differentiate the nodes by internal and external. An external node is a stocking point that a company doesn’t own. On the other hand, internal include stocking points that are not fully own but have control and visibility over its warehouses.
Still on the terminology, the first node of a supply chain is the supply echelon, while the last one is the demand echelon. The first have contact with external suppliers and the last with customers.
Types of Multi-Echelon Supply Chain
There are four main types of multi-echelon supply chain, they are:
- Serial: that’s the simplest one, where the nodes have one path – meaning one downstream (client node) and one upstream (supplier node).
- Assembly: here each node has only one downstream but possibly multiple upstream. We call it assembly because it needs more than one supplier for the node.
- Distribution: that’s the opposite of the assembly. In the distribution each node has multiple downstream but only one upstream. That’s the case, for instance, of distributors with a central warehouse that ships to multiple clients.
- General: finally, we have the general case where the node can have multiple up and downstream.
Multi-Echelon Inventory Optimization
Basically, there is two main ways of dealing with inventory optimization on a multi echelon supply chain. Both emerging from the second half of the 20th century, where supply chain networks were already complex.
The first one is the Stochastic-service Model (SSM), that tries to model the network including all the possibilities and variabilities. This model becomes extremely complex when one node deals with multiple suppliers with various internal service levels.
The second one is the Guaranteed-service Model (GSM), and have a simpler prerogative: the safety stock icovers only demand variation up to a threshold. Any demand above that needs exceptional means.
Supply chain specialist Nicholas Vandeput considers the GSM model much simpler but states that there is no easy way to decide which model is the best one. He also says that in most cases, GSM result in lower costs, with studies suggesting from 4 to 10% overall cost reduction.
It’s always important to avoid risks facing your supply chain with a proper model of optimization and inventory policy. Every business face risks such as holding too much inventory, stockouts, bullwhip effects and fight over shortages.
In a context of complex supply chains, you need to analyze what works for your company and always measure the results, seeking to maximize efficiency and always reduce costs.
Multi-echelon supply chains, due to their complexity, are much harder to arrive at an optimal point. But following procedures and verified models can assure your operations and maintain a healthy supply.