Last post, I discussed in some detail the concept of cycle service level and how it works in the retail or a B2C environment. This week, let me take up the case of a business in a B2B environment. Typically, in a B2B environment, the orders are placed in bulk over the phone or the web. The customer typically is another business requiring large amounts of products to feed into their production process. An order is also usually made of multiple line items where the customer asks for multiple products on the same order.
Very often in a B2B environment, there is also a qualification process for the supplier to go through before they can sell the product to the customer. The qualification can be quality and volume related. There is also the idea of a business relationship where the two companies have done business with each other for a long time. There is often room for some negotiation when the order arrives because of pre-existing business relationships. For example, it might be possible to negotiate a later delivery date or split the delivery into two parts, with the first part delivered fairly quickly to keep the customer going and the second part delivered a few days later.
In these cases, the appropriate way of measuring the service level could be based on the idea of fill rate. Fill rate can be defined as: the percent of demand that was fulfilled or straight out of inventory when the customer wanted it. Thus if the customer wanted 1000 units, and the business was able to deliver 800 units immediately, that would be an 80% fill rate. (By contrast, the cycle service level would be 0% on account of the resulting stock out). Variants of these methods include calculating the fill rate based on order line item, quantities, etc.
Businesses that resemble what I have described above should consider using a fill rate based safety stock formula. Similar to the cycle service level formula, this also takes into account demand and lead time variability, but it also incorporates other factors such as lot sizes.
Let us now think back to the example of the retailer described in part one. On all 30 days when the stock out happened, some customer demand was satisfied. In the fill rate method, the service level calculation would give credit for that portion of the demand. However, the cycle service level method would go only by the stock outs and therefore give a 0% score on those days. In most B2B environments, this might be a very severe metric.
In summary, let me describe some general suggestions on when to use which service level. As always, these are very basic rules of thumb and not to replace detailed analysis of your specific data. Also, one rule seldom applies to the entire business. Segmentation of data and using appropriate rules for specific segments is recommended.
- In the absence of continuous review of inventory: Cycle Service Level
- Continuous review + Steady demand items: Fill Rate Service Level
- Continuous review + unsteady or bulky or intermittent demand: Cycle Service Level
Have you experimented with the cycle and the fill rate service level calculations in your business? If so, I am interested in hearing from you.
Suggested reading: Using Coefficient of Variation as a Guide for Safety Stocks.