Posted in Operations and Supply Chain Terms, Total Reads: 8135
Definition: Echelon Inventory
Echelon inventory is defined as the inventory between a stage in the supply chain and the final customer. This helps when we are determining the safety inventories at an individual stage in the supply chain because it will depend not on the local inventory but it will depend on the inventory that is available at the previous and next stages too and will help in minimizing the safety inventories for the individual stages.
If we consider a retailer who takes inventory from a supplier and sells to customers, the safety inventory would be dependent on the demand estimation from the customer and the supply uncertainty. Here, supply uncertainty depends upon the safety inventory that the supplier carries. Thus, if the supplier increases the level of safety inventory the retailer can reduce its safety inventory levels. Thus an optimal value for both can be reached upon.
Hence, it is important for stages in a supply chain to interact with each other regarding their inventory levels and consider the echelon inventory for calculations and not local inventory.