Inventory optimization software that supports what-if analysis will expose the tradeoff of stockouts vs. excess costs of varying service level targets. But first it is important to identify how “service levels” is interpreted, measured, and reported. This will avoid miscommunication and the false sense of security that can develop when less stringent definitions are used. Clearly defining how service level is calculated puts all stakeholders on the same page. This facilitates better decision-making.
There are many differences in what companies mean when they cite their “service levels.” This can vary from company to company and even from department to department within a company. Here are two examples:
- Service level measured “from the shelf” vs. a customer-quoted lead time.
Service level measured “from the shelf” means the percentage of units ordered that are immediately available from stock. However, when a customer places an order, it is often not shipped immediately. Customer service or sales will quote when the order will be shipped. If the customer is OK with the promised ship date and the order is shipped by that date, then service level is considered to have been met. Service levels will clearly be higher when calculated over a customer quoted lead time vs. “from the shelf.”
- Service level measured over fixed vs. variable customer quoted lead time.
High service levels are often skewed because customer-quoted lead times are later adjusted to allow nearly every order to be filled “on time and in full.” This happens when the initial lead time can’t be met, but the customer agrees to take the order later, and the customer quoted lead time field that is used to track service level is adjusted by sales or customer service.
Clarifying how “service levels” are defined, measured, and reported is essential for aligning organizations and enhancing decision-making, resulting in more effective inventory management practices.
