The Inventory Problem Hiding in Plain Sight
Here's something we see regularly when working with supply chain teams across Australia and New Zealand: an organisation that's spent real money on demand planning tools, invested in warehouse automation, and negotiated hard with suppliers — yet still carries too much of the wrong stock in the wrong places.
The symptoms are familiar. A distribution centre in western Sydney is bursting at the seams with slow-moving SKUs while a regional depot in Queensland keeps running out of fast-movers. Safety stock buffers are set independently at each node, often by well-intentioned planners using rules of thumb that haven't been revisited in years. The finance team is asking pointed questions about working capital, and customer service metrics are stubbornly stuck below target despite all that inventory investment.
If this sounds familiar, you're not alone. And the root cause is almost always the same: the organisation is optimising inventory at each location independently, without considering how stock levels at one point in the network affect every other point.
This is the problem that multi-echelon inventory optimisation — commonly abbreviated as MEIO — is designed to solve. It's not new in theory, but it's increasingly practical for mid-market and enterprise organisations in Australia, thanks to advances in planning technology, better data availability, and a sharper focus on supply chain efficiency driven by years of disruption.
What Is Multi-Echelon Inventory Optimisation?
Let's cut through the jargon. A "single-echelon" approach to inventory management means each location in your supply chain — your central warehouse, your regional distribution centres, your retail stores or customer-facing depots — sets its own inventory targets in isolation. Each node determines its own safety stock, reorder points, and order quantities based on its own demand history, its own lead times, and its own service level objectives.
That approach works well enough for simple supply chains. If you've got one warehouse shipping directly to customers, single-echelon planning is probably sufficient.
But most Australian supply chains aren't that simple. You might have imported goods arriving at a port, moving to a central DC, then redistributing to state-based warehouses, and onwards to branch locations or stores. You might have manufacturing sites feeding multiple distribution tiers. Defence sustainment networks, in particular, can involve four or five echelons from original equipment manufacturer through to the point of use at a maintenance facility or deployed unit.
In these multi-tier networks, the inventory decisions at one level directly affect every other level. If your central DC carries more safety stock, your regional DCs can probably carry less — because replenishment from the centre is more reliable. Conversely, if your upstream supply is unreliable, every downstream node needs to buffer independently, driving up total inventory investment across the network.
Multi-echelon inventory optimisation treats the entire network as an interconnected system. Rather than optimising each node independently, it determines the optimal placement and quantity of inventory across all echelons simultaneously, balancing total cost against desired service levels across the whole chain. The result is typically lower total inventory with equal or better customer service — because stock is positioned where it creates the most value, not where it happens to have accumulated.
Why It Matters Now for Australian Organisations
There are several converging pressures making MEIO increasingly relevant for Australian supply chain leaders.
Working capital is under scrutiny. After years of supply chain disruption — pandemic-era shortages, container shipping volatility, geopolitical uncertainty — many organisations overcompensated by building inventory buffers at every point in the network. CFOs are now asking whether all that stock is actually needed, or whether capital could be redeployed more productively. MEIO provides the analytical framework to answer that question with data rather than opinion.
Service expectations keep rising. Whether you're serving retail customers expecting next-day delivery, government agencies with strict availability targets, or Defence platforms that can't afford parts shortages, the bar for service performance continues to lift. The paradox is that meeting higher service levels doesn't necessarily require more inventory — it requires smarter inventory placement. That's exactly what MEIO delivers.
Supply chains are getting more complex, not less. The push towards sovereign manufacturing capability in Defence, the growth of omnichannel retail, the regionalisation of supply networks in response to geopolitical risk — all of these trends are adding echelons and complexity to Australian supply chains. The more complex the network, the greater the gap between single-echelon and multi-echelon performance.
Technology has caught up with the theory. MEIO has been well-understood in academic literature for decades. What's changed is that the technology platforms to implement it — advanced planning systems (APS), digital twins, cloud-based optimisation engines — are now accessible to mid-market organisations, not just global multinationals with massive IT budgets. Platforms from vendors like o9 Solutions, Kinaxis, Blue Yonder, and others now offer MEIO capabilities that can be deployed on realistic timescales and budgets.
Single-Echelon vs. Multi-Echelon: What's Actually Different?
To make this concrete, consider a simplified Australian distribution network: an import warehouse in Melbourne receiving goods from overseas suppliers, two regional DCs (one in Sydney, one in Brisbane), and a network of 20 branch locations across the eastern seaboard.
Under a single-echelon approach, each of the 23 nodes calculates its own safety stock independently. The Melbourne warehouse looks at its lead time from overseas suppliers and the variability of demand from its two regional DCs. Each regional DC looks at its lead time from Melbourne and the variability of demand from its branch locations. Each branch looks at its lead time from the regional DC and the variability of customer demand.
The problem is that this cascading approach doesn't account for the interdependencies. If the Melbourne warehouse reliably holds sufficient stock, the regional DCs don't need as much buffer — but a single-echelon model doesn't capture that relationship. Every node buffers against its own worst-case scenario, and the total network inventory ends up significantly higher than it needs to be.
Under a multi-echelon approach, the optimisation model considers the entire network simultaneously. It might determine that shifting more safety stock upstream to the Melbourne warehouse — where a single unit of buffer protects both the Sydney and Brisbane DCs — reduces total network inventory while maintaining or improving end-customer service. Or it might identify that certain fast-moving, high-variability items should carry safety stock at the branch level (close to the customer) while slower, more predictable items should buffer centrally.
The results can be striking. Published research and vendor case studies consistently report inventory reductions of 15–30% with maintained or improved service levels when organisations move from single-echelon to multi-echelon approaches. The exact figure depends on the complexity of the network, the quality of the data, and how far the existing inventory policy is from optimal — but the direction is almost always the same: less total inventory, better-positioned stock, improved service.
The Practical Challenges of MEIO Implementation
If MEIO is so effective, why isn't everyone doing it? Because the theory is easier than the practice. Here are the real-world challenges we see when working with organisations across Australia.
Data Quality and Availability
MEIO models are only as good as the data that feeds them. You need accurate demand data at each echelon, reliable lead time information for each supply link, inventory holding costs by location, and clear definitions of service level targets by customer segment or product group. Many organisations discover, when they start an MEIO initiative, that their data is patchy, inconsistent, or locked in spreadsheets and legacy systems. The data cleansing and integration work often takes longer than the optimisation modelling itself.
Organisational Alignment
In many organisations, inventory decisions are decentralised. Each regional warehouse manager or branch operations lead sets their own stock levels, often based on local experience and relationships rather than network-wide optimisation. Moving to MEIO requires a cultural shift: accepting that the optimal inventory level at your location might go down because the network as a whole performs better with stock positioned elsewhere. That's a hard conversation, especially when individual performance metrics are tied to local service levels rather than network performance.
Technology Integration
MEIO doesn't operate in a vacuum. It needs to connect with your ERP system for transactional data, your warehouse management system for inventory positions, your demand planning tools for forecast inputs, and your procurement systems for lead time and supply reliability data. Getting these systems to talk to each other — reliably, in near-real-time — is a significant integration challenge, particularly for organisations running legacy ERP platforms or operating across multiple disconnected systems.
Change Management
Even with the right data and technology, MEIO only delivers results if planners actually use the optimised parameters. If your team doesn't trust the model outputs and continues to override recommended safety stock levels based on gut feel, you'll have invested in technology without capturing the value. Building planner confidence through pilot programmes, transparent model logic, and progressive rollout is essential.
Where MEIO Delivers the Most Value in Australia
Not every supply chain needs multi-echelon optimisation. For a simple, single-tier distribution model, the incremental benefit over good single-echelon planning may not justify the investment. But for several sectors that are prominent in the Australian market, MEIO can be transformative. The common thread across these sectors is complexity: multiple tiers of distribution, high stakes for stockouts, significant capital tied up in inventory, and networks that span a geography where freight costs and lead times really matter.
Defence and Aerospace Sustainment
Defence supply chains are textbook multi-echelon environments. Parts flow from OEMs and repair facilities through national supply depots, to base-level stores, to unit-level holdings, and ultimately to the maintenance point on a platform. The penalties for stockouts are severe — an unavailable part can ground an aircraft or delay a vessel's return to service. At the same time, Defence organisations hold billions of dollars in inventory, much of which is slow-moving or obsolete. MEIO offers a way to improve availability while reducing the total inventory investment — a priority that aligns with ongoing sustainment reform programmes and the focus on supply chain resilience under AUKUS. Trace has worked extensively with Defence clients on inventory management and supply chain strategy, and we consistently find that multi-echelon thinking unlocks significant value in these complex networks.
Retail and FMCG
Retailers and FMCG distributors with multi-tier distribution networks — central DC to state DC to store — are natural candidates for MEIO. The challenge of balancing product availability at shelf with working capital efficiency is precisely the trade-off MEIO is designed to manage. This is especially true for organisations with long product tails where a large number of slow-moving SKUs create disproportionate inventory holding costs. MEIO can help rationalise safety stock across the tail while protecting availability on the fast-movers that drive revenue. Our team regularly supports retail and FMCG supply chain planning across Australia and New Zealand.
Rail, Transport, and Infrastructure
Maintenance supply chains for rail operators, infrastructure managers, and asset-intensive utilities share many characteristics with Defence sustainment. Parts are distributed across depots and workshops, lead times for specialised components can be long, and the consequences of stockouts — delayed maintenance, asset downtime, service disruptions — are operationally and commercially significant. Inventory optimisation in transport and infrastructure is an area where we see growing demand for multi-echelon approaches.
Health and Aged Care
Healthcare supply chains — particularly those serving hospital networks, aged care providers, and pharmaceutical distributors — involve multiple distribution tiers with stringent service requirements. Product expiry management adds another layer of complexity. MEIO can help health and aged care organisations reduce waste from expired stock while maintaining the availability levels that patient care demands.
Getting Started: A Pragmatic Approach
For organisations considering MEIO, we'd recommend a phased approach rather than a big-bang implementation. The organisations that extract the most value from MEIO are those that treat it as a capability to build, not a project to deliver.
Start with a diagnostic. Before investing in technology, understand where the opportunity lies. Map your supply chain echelons, quantify your current inventory investment by tier and product group, and benchmark your actual service levels against targets. This diagnostic often reveals that a significant portion of your inventory is in the wrong place — and that's the foundation for building the business case for MEIO. In our experience, the diagnostic phase also surfaces data gaps and system limitations that need to be addressed before any optimisation model can be trusted.
Pilot on a bounded scope. Don't try to optimise the entire network in one go. Choose a product group or network segment that's representative but manageable — perhaps a single product category flowing through your full distribution network, or a single regional sub-network. Run the MEIO model, compare the results to current policy, and validate the recommendations with your planners. This builds confidence and identifies data or process issues before you scale. A well-run pilot typically takes eight to twelve weeks and provides enough evidence to secure investment for broader rollout.
Invest in the enablers. MEIO technology is only one piece of the puzzle. You'll also need clean master data, integrated systems, trained planners, and governance processes to maintain optimised parameters as conditions change. Don't underestimate the investment in these enablers — they're often what separates successful MEIO implementations from expensive shelf-ware. This is particularly important in the Australian context, where many organisations are still running legacy ERP systems or fragmented planning environments that weren't designed for cross-network optimisation.
Measure and iterate. Define clear KPIs — total inventory investment, inventory turns, service levels by echelon, working capital as a percentage of revenue — and track them rigorously through the pilot and rollout phases. Use the data to refine the model, adjust parameters, and demonstrate value to leadership and finance teams. The best MEIO implementations are living systems that are continuously updated as demand patterns shift, supply conditions change, and the network evolves.
How Trace Consultants Can Help
At Trace Consultants, we work with organisations across Defence, government, retail, FMCG, transport, and aged care to design and implement supply chain strategies that deliver measurable results. Multi-echelon inventory optimisation sits at the intersection of several of our core capabilities.
Inventory strategy and network design. We help clients understand their current inventory position, map their supply chain network, and identify where multi-echelon optimisation can deliver the greatest impact. Our strategy and network design capability combines analytical rigour with deep operational experience — we don't just model the optimal network, we help you build the business case and execute the transition.
Demand planning and S&OP. MEIO depends on quality demand signals. We help organisations improve their planning and operations processes, from demand forecasting and Sales & Operations Planning through to integrated business planning, ensuring that inventory optimisation decisions are grounded in realistic demand expectations.
Technology selection and implementation. We're technology-agnostic, which means we recommend the platforms that best fit your requirements and maturity level — whether that's an enterprise APS solution, a specialised MEIO tool, or a pragmatic approach built on Power Platform (Power BI dashboards, Power Apps workflows, and Power Automate integrations) to get you started without a massive technology investment. We don't just recommend technology — we build and implement it.
Data analytics and modelling. Our consultants are hands-on with data. We build the models, clean the data, run the scenarios, and translate the outputs into actionable recommendations. Whether it's a network optimisation model, a safety stock simulation, or a scenario analysis for a new distribution strategy, we bring the analytical depth combined with practical supply chain experience.
Change management and capability building. We know that the best model in the world is worthless if your planning team doesn't use it. That's why every engagement includes a focus on building internal capability, training planners, and embedding governance processes that sustain performance after we step back. Our project and change management approach ensures that improvements stick.
What sets us apart is that we don't stop at the strategy deck. Our consultants have done this work in practice — they've cleaned the data, built the models, sat with planners to calibrate the parameters, and tracked the results through to the balance sheet. We're a boutique firm that puts senior people on every engagement, with deep expertise in supply chain and procurement across both public and private sectors.
The Bottom Line
Multi-echelon inventory optimisation isn't a silver bullet, and it's not the right starting point for every organisation. If your demand data is unreliable, your master data is a mess, or your S&OP process doesn't exist, you've got foundational work to do first. But for organisations with multi-tier supply chains, reasonable data maturity, and a genuine appetite to improve working capital efficiency without sacrificing service, MEIO represents one of the highest-return investments in supply chain performance available today.
The Australian supply chain landscape — with its vast geography, import dependency, growing complexity in Defence and infrastructure, and increasingly demanding customers — makes MEIO especially relevant. The organisations that get this right will carry less inventory, deploy capital more effectively, and deliver better service than their competitors. Those that don't will keep wondering why their warehouses are full and their customers are still waiting.
If you're interested in exploring what multi-echelon inventory optimisation could deliver for your organisation, get in touch with our team. We'd welcome the conversation.
Trace Consultants is an Australian supply chain and procurement consultancy with offices in Melbourne, Sydney, Brisbane, and Canberra. We specialise in strategy, operations, and technology across Defence, government, retail, FMCG, health, and infrastructure sectors. Learn more at traceconsultants.com.au.
