Part I – service level indicators for a single product item
Determining the required level of service from an inventory management perspective is a fairly common activity. Usually the service level (service level) is presented in percentage terms, such as 95%. The problem is that we usually do not think about what this measure means in practice. Typically, when asked, managers point to this figure as indicating the share of orders completed at 100%. So, if a customer placed 100 orders (usually multi-item orders) in a given period, 95 of them were fulfilled in full. This understanding of service levels falls under the concept of the OTIF (on time in full) indicator, where “in full” is primarily responsible for proper inventory management. This indicator is quite obvious as a basis for evaluating a supplier and can, for example, form the basis of contractual provisions. It is worth noting that this understanding of the level of service will be the basis of the consumer’s evaluation (albeit informal) of the supermarket, i.e. how often he gets everything that was on his shopping list.
The problem is that the level of service thus defined is not the same as the level of service defined for each individual line item for managing its inventory (i.e., determining when and in what quantity to place orders). These quantities are, of course, interrelated, although it is very difficult, and sometimes impossible, to define such relationships precisely.
In this article, we will look at service level indicators related to individual line items. These include:
1 Probability of Serving Demand during the replenishment cycle (POP). This indicator is crucial from the point of view of inventory renewal control, as it directly affects the level of safety stock.
2. Degree of Quantitative Realization – expressed in percentage terms, the quantitative degree of service of demand in the replenishment cycle (SIR). This indicator can be important for estimating losses due to shortages in inventory.
3. Availability level – the probability of availability of an item at any time – in practice, on any day, week (PD). This indicator is important from the customer’s point of view.
The essence of these indicators and the relationship between them can be exemplified ex post, that is, by estimating their values for a past period, such as a year. The table shows historical data for 52 weeks. The replenishment cycle time was assumed to be 3 weeks. A reasonable assumption has also been made that any supply shortage occurs in its final week.
Calculation of service level indicators for the past year:
1. POP – there were 10 replenishment cycles, two of which (the fifth and eighth) were burdened with shortages.
2. SIR – Total demand amounted to 5,281 units. A total of 5 stock shortages were reported.
3. PD – number of observed periods – 52 (weeks). Number of periods in which deficiencies occurred – 2.
In Part II, we will look at the relationship of these indicators to aggregate volumes – in relation to the total assortment and to the degree of fulfillment of multi-position orders.
This article was written thanks to the funds from the European Union’s co-financing of the Operational Program Intelligent Development 2014-2020, a project implemented under the competition of the National Center for Research and Development: under the “Fast Track” competition for micro, small and medium-sized entrepreneurs – competition for projects from less developed regions under Measure 1.1: R&D projects of enterprises Sub-measure 1.1.1 Industrial research and development work carried out by enterprises. Project title: “Developing software to improve forecast accuracy and inventory optimization from the perspective of customer and supplier collaborating in the supply chain using fuzzy deep neural networks.