Echelons and nodes are very helpful concepts to visualize an end-to-end supply chain. Let us take an automotive supply chain. It contains four levels of suppliers Tier-4, Tier-3, Tier-2 and Tier-1. The Tier-4 supplier supplies to Tier-3 and Tier-3 supplies to Tier-2 and so on until Tier-1. The Tier-1 supplier supplies to the OEM that is the car manufacturing plant. Once the cars are manufactured they are sent to Regional Distributors from where it is sent to the Dealers who manages the showrooms.
How many echelons do we have in this example? Totally we have 7 echelons. They are
Car Manufacturing Plant
Regional Distributors and
Tier-4 has 2000 nodes
Tier-3 has 1000 nodes
Tier-2 has 500 nodes
Tier-1 has 50 nodes
Car Manufacturing Plant is one node
There are about 4 Regional Distributors in Chennai, Mumbai, Kolkatta and Delhi
Across India this company has about 400 showrooms.
So what are echelons. They are the layers of similar entities in supply chain. This Car Plant has 50 Tier-1 suppliers and these 50 are called nodes. Each entity is a node and a group of similar nodes form an echelon. Any given supply chain can be explained in terms of echelons and nodes. The combination of echelons and nodes also defines the minimum amount of inventory that is necessary to provide a particular level of customer service. Hence the first step in inventory optimisation is to map the echelons and nodes and to find out the least possible amount of inventory the system need to carry for the given level of customer service and then trying to achieve that minimum inventory goal.