Unsold inventory acts as a drag on the supply chain—and on profitability—by tying up working capital. That's why supply chain executives might want to consider deploying advanced, "multiechelon" inventory optimization software that can minimize the total amount of stock across all nodes in the supply chain.

Earlier versions of inventory optimization software simply looked at stock held at specific locations. When multiechelon solutions calculate the amount of safety stock, they consider all inventory throughout a supply chain to be interrelated.

Today's multiechelon applications use parameters set by the software user (such as service levels and cost) to calculate how much inventory should be held at multiple points in the supply chain—for example, at the factory, at the central distribution center, and in regional distribution facilities. Some multiechelon solutions only deal with finished goods, while others also include raw materials and work in process (WIP) in their calculations.

Because multiechelon software views all inventory in the supply chain as a common pool for filling orders, it typically results in a company keeping less stock overall to serve its customers. In addition, these applications can also boost order fill rates because they ensure that the right items are on hand in the correct locations.

Multiechelon inventory optimization solutions could become even more powerful and precise in the future. That's because many analysts expect the software's inventory calculations to become more "demand-driven." A number of vendors are already working toward solutions that will use demand (based on point-of-sale data) as an input for inventory calculations and location deployment. When that happens, companies could keep even less stock on hand, further reducing working capital while still being responsive to customer demands.