Service Level Inventory: Everything You Need to Know in 2023
In this article, we will explore what service level inventory is and its significance. We will also share our 10 step process for managing service level inventory effectively. Read on to learn more.
What is Service Level Inventory?
Service level inventory refers to the amount of stock kept on hand to achieve a specified service level in inventory management. This service level represents the probability that there is sufficient inventory to meet demand without experiencing a stockout.
Example: Service level inventory for the iPhone 13 at TechStore is set at 500 units. This ensures a 98% probability of meeting customer demand without stockouts for the month of November.
Importance of Service Level Inventory
Service level inventory is important for a number of reasons. Some of the most common reasons include:
1. Optimized Stock Levels:
Service level inventory ensures that businesses maintain an optimal amount of stock to prevent both overstocking (which ties up capital and incurs holding costs) and understocking (which can lead to missed sales opportunities).
2. Customer Satisfaction:
By reducing the likelihood of stockouts, service level inventory helps in meeting customer expectations consistently, fostering trust, and ensuring repeat business.
3. Financial Efficiency:
It provides a data-driven approach to inventory management which allows businesses to allocate resources more efficiently and reduce unnecessary costs associated with excess inventory or emergency restocking.
4. Supply Chain Reliability:
A well-maintained service level inventory acts as a buffer against unforeseen disruptions in the supply chain. This ensures that businesses can continue to meet customer demands even when faced with supply challenges.
10 Steps to Effective Service Level Inventory Management
Use our 10 step process to effectively manage your service level inventory. Simply follow the steps below:
Step 1. Determine Desired Service Level
Define the service level you aim to achieve. This is often expressed as a percentage that represents the probability of meeting demand without a stockout.
Example: For the upcoming holiday season, TechShop decided to target a 97% service level for their best-selling product, the GalaxyTab S8.
Step 2. Analyze Historical Demand Data
Examine past sales and demand data for the product in question over a relevant period to predict future demand.
Example: For the GalaxyTab S8, TechShop examines the last six months of sales data and observes an average monthly demand of 2,000 units.
Step 3. Calculate Safety Stock Levels
Determine the amount of safety stock needed based on the desired service level and variability in both demand and lead time.
Example: Given the sales data and targeted service level, TechShop calculates a safety stock of 100 units for the GalaxyTab S8 to buffer against unexpected demand spikes.
Step 4. Monitor Lead Times
Keep track of lead times from suppliers to ensure timely restocking and adjust safety stock levels as necessary.
Example: TechShop's main supplier for the GalaxyTab S8 usually delivers within 15 days, but due to seasonal shipping delays, a buffer of 5 days is added. This results in a 20-day lead time.
Step 5. Implement Periodic Reviews
Establish regular intervals to review inventory levels and adjust based on actual demand and changes in the business environment.
Example: Every month, TechShop reviews the actual sales of GalaxyTab S8 and finds that in February, the actual demand was 2,500 units. This prompts a re-evaluation of safety stock levels.
Step 6. Consider Seasonal Variations
Factor in expected demand changes due to seasonal trends, promotions, or external events.
Example: TechShop expects a 20% increase in GalaxyTab S8 sales during the back-to-school season so they adjust their service level inventory upwards for August and September.
Step 7. Maintain Open Communication with Suppliers
Stay in constant dialogue with suppliers to understand potential disruptions or changes in lead times.
Example: The supplier of GalaxyTab S8 informs TechShop of a potential strike at their manufacturing unit which signals a possible delay. TechShop then considers secondary suppliers to ensure inventory stability.
Step 8. Use Technology and Tools
Invest in inventory management software or tools that can automate calculations, provide real-time data, and forecast demand more accurately.
Example: TechShop uses the "InventoPro" software which predicts a spike in GalaxyTab S8 sales based on new online trends and recommends adjusting the service level inventory accordingly.
Step 9. Train Inventory Management Team
Ensure that the team understands the importance of service level inventory and is equipped with the knowledge and tools to manage it effectively.
Example: TechShop conducts bi-annual workshops for its inventory team. This emphasizes the significance of balancing service level inventory for the GalaxyTab S8 with storage costs and potential stockouts.
Step 10. Review and Iterate
After implementing the framework, continuously review its effectiveness, gather feedback, and make necessary adjustments to improve and optimize.
Example: At the end of the year, TechShop reviews its service level inventory practices for the GalaxyTab S8, gathers insights from the sales and inventory teams, and refines its approach for the next year.
Example
GreenGrocer Foods is a retail store that is looking to optimize its inventory for its best-selling organic almond milk, the "AlmondPure." Here’s how they implemented our simple 10 step process:
Step 1. Determine Desired Service Level
With the summer season approaching, known for increased consumption of almond milk for smoothies, GreenGrocer Foods aims for a 98% service level for their AlmondPure almond milk.
Step 2. Analyze Historical Demand Data
GreenGrocer Foods evaluates the previous year's sales of AlmondPure during the summer months and identifies an average monthly demand of 5,000 cartons.
Step 3. Calculate Safety Stock Levels
Given last summer's sales data and the set service level target, GreenGrocer calculates a safety stock of 120 cartons of AlmondPure to counteract unforeseen demand surges.
Step 4. Monitor Lead Times
Typically, GreenGrocer's almond milk supplier can restock AlmondPure within 10 days. Considering a potential surge in demand from all retailers during summer, they factor in an extra 4 days which leads to a 14-day lead time.
Step 5. Implement Periodic Reviews
Each week, GreenGrocer checks the sales data of AlmondPure and observes that in June, there was an unprecedented demand of 5,800 cartons. This prompts them to adjust their safety stock calculations.
Step 6. Consider Seasonal Variations
Knowing that a national vegan festival takes place in August, GreenGrocer anticipates a 25% increase in AlmondPure sales for that month and plans inventory accordingly.
Step 7. Maintain Open Communication with Suppliers
AlmondPure's main supplier alerts GreenGrocer Foods about a poor almond harvest which hints at potential stock limitations. GreenGrocer then initiates dialogue with alternate suppliers to maintain their inventory levels.
Step 8. Use Technology and Tools
GreenGrocer adopts the "OrganicStock Optimizer" software, which, by analyzing health trends and social media, predicts rising demand for AlmondPure due to a new viral almond milk-based recipe. This insight helps GreenGrocer adjust its stock levels in real time.
Step 9. Train Inventory Management Team
GreenGrocer hosts monthly training sessions for its inventory staff. They focus on the importance of managing the service level inventory for perishable products like AlmondPure to minimize wastage and maximize customer satisfaction.
Step 10. Review and Iterate
As autumn approaches, GreenGrocer reviews its service level inventory strategy for AlmondPure. By collecting feedback from sales, customers, and the inventory department, they tweak their approach and aim for enhanced efficiency during the next high-demand season.
We hope that you now have a better understanding of what service level inventory is and how to manage it effectively.
