at any given level or echelon on other echelons. For example, if the product sold in a retailer’s outlet is received from one of its distribution centers, the distribution center represents one echelon of the supply chain and the outlet another one. It should be clear that the amount of stock needed at the outlets is a function of the service received from the distribution center. The better the service that is provided upstream, the smaller the protection that is needed downstream. The goal of multi-echelon inventory optimization is to continually update and optimize safety stock levels across all of these echelons. Multi-echelon inventory optimization represents the state of the art approach to optimize inventory across the end to end supply chain. Modeling multiple stages allows other types of inventory, including cycle stock and prebuild along with safety stock due to time phased demands, to be accurately predicted. As part of inventory optimization, supplier performance, customer service and internal asset metrics should be continuously monitored to enable continuous improvement. Benefits Companies have achieved financial benefits by employing inventory optimization. A study by IDC Manufacturing Insights found that many organizations that utilized inventory optimization reduced inventory levels by up to 25 percent in one year and enjoyed a discounted cash flow above 50 percent in less than two years. Electrocomponents, a United Kingdom based world’s largest distributor of electronics and maintenance products, increased profits by £36 million by using inventory optimization to achieve higher service levels while reducing inventory. Castrol used inventory optimization to reduce finished goods inventory by an average of 35 percent in two years while increasing service levels (defined as line fill rates) by 9 percent. Smiths Medical, a division of Smiths Group, used inventory optimization to better address demand volatility and supply variability, thus reducing the risk of both understocks and overstocks while smoothing out manufacturing cycles. See also Inventory Inventory theory Supply chain management Logistics Mathematical optimization References