Today, if you want to satisfy your customers, you have to give them the best shopping experience possible. As a result, what they want and what they need is critical information. So, how do you establish goals and then measure the satisfaction of customers? The service level formula can help you out!
What is the Service Level Formula?
Before we dive into the formula, let's first define the service level. In short, it is the number of customers that you were not able to satisfy. The thing is, though, it is impossible to make everyone happy, and from an economic perspective, satisfying everyone does not even make sense.
To accomplish this, you need to figure out the probability of you not reaching a stock-out or of you not losing sales. As a result, the key is to find the perfect middle. In this case, you want to be making as many customers happy without losing your sales or your profit margin. So, what is the service level formula? It is the number of quantities delivered on time, divided by the total amount of the demand. However, it can look a bit different depending on your industry or market segment, among many others. For example, if you are looking at the loss of sales then you will divide the value of quantities delivered on time by the value of the total amount of the demand, instead.
With the help of the information obtained by the service level formula, you will be able to figure out the safety stock! Keep reading to learn how.
How Do You Figure Out Safety Stock?
Safety stock is useful to have when dealing with any situations that you did not foresee coming. For example, you might see changes in your replenishment plan, or your demand may fluctuate, to name a few. While supply chain issues are inevitable, you will have a much higher rate of failure if you decide to use backorders instead. Indeed, they do work, but not as well, and they also come with a significant risk of losing not only sales, but also customer loyalty. While it is helpful to offer optimal prices, it is also highly beneficial that you have the most optimal stock levels. By having a safety stock, there is a much lower chance of you having stock out. So, how do you figure out this emergency stock?
To calculate it, you have to multiply the safety factor by the average replenishment lead time. Keep in mind, though, that this formula frequently needs other types of evaluations if you want to verify the results. When figuring out the inventory, it is also essential that you remember that the sales should not only satisfy the product carrying a cost, but also the cost of holding the safety stock!
As you can see, the service level formula can help you figure out the best way to satisfy your customers while ensuring the profit margin at the same time. It can also help you figure out how to find the safety stock to help keep you from reaching a stock out. However, manually calculating all of the criteria required to predict the demand does take up quite a bit of time. In addition, should you manually do it, there is a much higher probability of you making a mistake since humans are not machines! Thankfully, though, you can enlist the help of a software. For instance, if you always want to offer the most optimal prices, you can utilize Competera's pricing platform. The AI algorithms are created and optimized to provide you with correct and up-to-date predictions continuously.