Optimizing Service and Inventory Levels

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A main concern for most companies is how much inventory to keep in stock, and of which products. If you are a supplier, you likely have contractual fulfillment guarantees (or service levels). Optimizing service and inventory levels are key drivers in an organization’s profitability, which is what determines the future of any organization.

Service levels

Service levels measure the fulfillment rate, or the percent chance of stocking out of an item. A useful and generally accepted way to evaluate service level is the likelihood that an item will be in-stock when it is needed. So, a 95% service level means that there’s only a 5% likelihood of stocking-out. That said, service level may refer to Fill Rate, the percentage of demand that was satisfied without regard to the probability of stock out.

There’s also the question of item versus order service levels:

  • Item service levels: Ability to satisfy the number of units ordered
  • Order service levels: Ability to satisfy individual customer orders

Finally, service level performance varies significantly depending on the customer-quoted lead time used. It’s important to clearly distinguish what is being measured and over what time frame.

Current stock and inventory policies

An accurate measurement of your current inventory is a crucial data point. Ensure that it is correct before establishing the inventory needed to support specific service levels. Next, determine the policies that will apply to each product. You must also factor in lead time.

Leading supply chain planning software automatically performs these calculations based on the demand forecast for the specific item, inventory policy, and lead time. The supply chain planning solution calculates the needed raw materials or products needed. Now, the planner can model different service levels, perhaps see if the stock out probability changes if a more profitable inventory policy is selected, for example. What-if scenarios are where planners add the most value.

Bringing it all together

With definitions established, current inventory levels known, and inventory policies defined, planners can begin testing a myriad of scenarios (as long as they have a nimble supply chain planning platform). This ability stretches into the Finance office as well. With a true IBP platform, financial analysts can see the end-to-end financial impacts of demand changes, inventory strategy selections, purchase cost impacts, and more. By optimizing service and inventory levels, organizations can now effectively develop unique inventory strategies based on a variety of drivers, including demand profiles (like intermittent demand items).