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The Finished Goods Series
from E/Step Software Inc.
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Inventory Module
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Replenishment Planning

Distribution Planning

There is more than one way to calculate service

Here is an example of four real class-A parts from a service parts company and three rules for setting service.  The overall service is the same, but the safety stock inventory investment is very different.

Equal Service demoMany companies use the Fixed-Time-Supply rule.  An easy to understand (and to compute) rule of thumb, it is very expensive and often does not provide the desired service.  In this example, management wants safety stock to be a fifth of a year, or 10.4 weeks.  Based on each SKU's forecast error and lead time, the projected service (expressed in dollars backordered in this example) ranges from 60.4% to 100%.  It turns out that the second part, CB-667-5323 has fluctuating demand and a large forecast error.

The Equal Service rule gives each SKU the same service, about 96.4%. It recognizes that each part has a different forecast error, different lead times, and different replenishment policies.  It increases the investment on the second part from 10.4 weeks of safety stock to 26.1 weeks, a $550,000 increase.  But on the other three SKUs the inventory drops from 10.4 weeks down to 2.4 to 5.4 weeks.  The total inventory drops to 6.8 weeks, a reduction of $1.4 million in safety stock, or 35% for the same aggregate service level!  (The second SKU would be worth the effort to review in FGS' forecasting Simulation tool to look for opportunities to further reduce the forecast error.)

Opt Service DemoAnother rule for setting service is the Optimized Dollar Fill Service rule.  FGS uses advanced optimization algorithms to adjust each SKU's service up or down so that the total service is the same, but for the least possible inventory investment.  Notice the second SKU's inventory decreases from 26.1 weeks to 19.4 weeks and the service drops from 96.7% service down to 89.3%.  Some of this savings is invested in the other SKUs and the remainder is inventory reduction.  In this example the savings is about a half week, or $106,000, which is about 4%.  Typically the savings range from 3% to 50%.

View an example of the tool to set service.