The power of service levels into your business profitability
"I need a 100% service level" is a common expectation from management and commercial departments. However, purchasing and operational divisions understand that achieving 100% is unrealistic. In reality, setting an appropriate service level is a highly complex task.
Optimizing Your Service Levels for Maximum Profit
Many businesses set service levels based on vague criteria, leading to infrequent and ineffective reviews. Inappropriate service levels can impact safety stock and overall business performance. But with a well-thought-out approach, service levels can significantly boost profit margins and enhance internal processes.
The Impact of Service Levels on Profit Margins
Service levels reflect your company’s goal to meet customer needs within your stock capacity. They are a strategic translation of your business objectives into inventory management. Setting optimal service levels involves considering turnover, capacity, customer demand, and costs at an individual article level. Properly defined service levels can lead to substantial margin increases at both the article and assortment levels.
Insight into Internal Processes
Effective service levels provide valuable insights into your internal processes, balancing supply chain and demand chain factors. They show how well your processes can handle demand and the capacity you’re willing to use. Aligning service levels with your company's strategy ensures that both supply and demand influences are adequately considered. Misaligned service levels can decrease margins and disrupt internal processes.
Determining Optimal Service Levels
To determine the right service levels, consider both quantitative and qualitative criteria:
Turnover and Costs: Use ABC analysis to evaluate turnover and the cost of safety stock.
Customer Actions: Consider customer behavior during stock outs and the reliability of expected turnover.
Quantifying the appropriate service level requires a deep understanding of your processes and the unique criteria for each article. It’s a complex but achievable task that can align inventory strategy with business goals.
Start Optimizing Your Service Levels
Setting the right service levels is crucial for maximizing profit and improving internal processes. It involves a thorough analysis of both quantitative data and less tangible criteria. By aligning service levels with your company’s strategy and capacity, you can enhance your ability to meet customer demand and increase overall profitability.