When defining a service level, a number of components have to be taken into consideration including turnover, capacity, customer demand and cost.
These components and their relations can be defined on an article level. For example, knowing that the cost component has an exponential character, an appropriate service level on an article level can result in a large margin boost at an assortment level. Finding an optimal service level thus results into a margin boost on an article level, which in turn leads to a large margin increase at an assortment level. The advantage of a well-adjusted service level goes beyond margin increases as a thorough analysis also provides greater insight into your internal processes.
By internal processes, we mean the processes that should mitigate both the supply chain factors and the demand chain factors. A service level reflects your ability to meet demand and the capacity you are willing to use to satisfy this demand. If your capacity is not based on the right criteria, it may not have the desired effects. This occurs because certain supply and demand influences are not taken into account and as a consequence, this can cause a margin decrease.
In that case, simply increasing or decreasing your service level can make the issue even worse. Your service level should be a reflection of your internal processes and the maximum profit they could possibly generate.
From the service level and its effects, we can derive:. By automating your supply chain management processes you can improve efficiency and raise the bar in terms of your productivity and service levels. Introducing new technologies to speed up simple tasks will improve productivity, but also bring a level of consistency to your operations. Automation allows you to receive and use real-time data about your supply chain efficiency.
With such transparency you can spot where the problems lie and make changes for continual improvement. In retail, consumers are fickle and nearly always use sellers that can fulfil their needs quickly. In the B2B world, customers tend to use manufacturers and suppliers they can depend on. Being able to accurately predict product demand is necessary to ensure you can provide customers with the products they want, and when they want them.
If you underestimate demand then you run the risk of stock outs and lost sales. Demand forecasting will help you stock the right products so that you can fulfill customer orders with the shortest possible lead times.
Inventory classification methods, such as ABC analysis , can help inventory management teams to improve current customer service levels.
Using this method, you can classify products in your warehouse based on their value to the business. Root III began writing professionally in By George N. Root III.
Time to Fulfillment Good inventory control means that your time to fulfill orders stays low. Returns Inventory management helps you maintain customer satisfaction when it comes to product returns. Pricing When you have a well-designed inventory management system, you are able to reduce the amount of time that products sit on your shelves. Keep in mind, there are plenty of states that have inventory tax , so make sure to look up your place of business to see if you are affected.
The business should also decide how much money will be spent on space, since inventory is often held in spaces that are leased. It is easy to forget about what costs a company incurs simply by letting inventory sit and take up space. Next, risk is not so easily measurable, as it is the cost risk of products being stolen, damaged, or perished before sale.
To calculate your carrying costs, you need to know how much inventory you have, your inventory carrying cost as a percentage of product cost, and the average cost per unit of inventory. Luckily, technological advancements in shipping have cut invoice processing costs down significantly almost 6x lower.
In the case of a manufacturer, production setup costs would be used instead of ordering costs. Stockout costs occur when sales are lost due to items being out of stock.
These hit companies negatively in two ways — sales are missed because of depleted inventory levels, and the company reputation is harmed due to poor customer service from out-of-stock products. These costs can be avoided through proper analytics of seasonal and market demands for the product. Most companies that do not have an in-house or outsourced analytics teams run into issues here. The key is to be adaptable. Most of the ability to accurately forecast demand and inventory needs boils down to an understanding of your product, market, and industry, as well as analytics behind consumer purchasing behaviors.
Obviously products that have higher demand and quicker life cycles are more difficult to track, so every company will need to take a slightly different inventory management approach. Make sure to understand and recognize how much your firm spends on stockout costs, carrying costs, and ordering costs per year, and when these costs come in to play during the product life cycle. These variables will all benefit your company in creating more streamlined, cost-effective, and proper inventory management practices.
A barcode system can easily gather information that would be difficult or impossible to gather in other ways. This allows managers to make fully informed decisions that can affect the direction of a department or company.
Faster access to information goes hand in hand with better decision-making. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Skip to content. Understanding Demand: Independent Demand vs.
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