Definition and Types of Service Levels



What is Service Level?

Service Level is a crucial Key Performance Indicator (KPI) that assesses the overall efficiency of a production chain. This KPI is a linchpin for Supply Chain Managers as it also quantifies the quality of response to customer needs. By measuring an organization’s ability to fulfill orders within a given timeframe, the Service Level underscores multiple facets of customer satisfaction: Did the product arrive on time? Was the quality up to par? Was the entire order fulfilled?

Types of Service Levels

Service Level by Time

This type quantifies how many orders were fulfilled within the agreed time. It’s calculated by dividing the number of on-time orders by the total number of orders.

Quality-Based Service Level

This variant accounts for quality issues. Dispute orders are removed from the numerator of the previous equation, giving the service level for orders both on-time and in good condition.

Weighted Service Level

The Weighted Service Level is calculated by taking the total number of orders to be delivered, less any late orders, divided by the total number of received orders. This provides a more nuanced perspective, accounting for factors like order size.

Optimizing Service Level

Optimizing your service level directly influences the overall efficiency of your production chain. Revenues are optimized, striking the best balance between inventory costs and demand volume. By reducing your available inventory, you increase your liquidity. However, less frequent stockouts might take several years to significantly decrease your customer churn rate.

Methods of Optimization

ABC Analysis

The top 20% of the most revenue-generating products are labeled “Critical Products” and should have a service level above 95%. The next 25% are “Intermediate Products” with relaxed goals, between 90% and 95%. The remaining 50% are “Secondary Products” with service levels between 85% and 90%.

Cost Analysis

This method involves comparing the cost of holding inventory against the cost of a stockout. The higher the storage cost, the more the organization is inclined to reduce it, consequently lowering the service level. If the cost of a stockout is high, the organization would rather increase its inventory levels to meet demand.

Understanding and optimizing Service Level is a cornerstone in Supply Chain Management. Going beyond this KPI can offer insights into other factors that contribute to supply chain efficiency and long-term sustainability of your organization.