Service Level

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Service Level - short version

Refers to the number of units that can be supplied from stock currently on hand.

Service Level - long version

Service level measures the performance of a system. Certain goals are defined and the service level gives the percentage to which they should be achieved. Service level is used in supply chain management and in inventory management to measure the performance of inventory systems.

Under stochastic conditions it is unavoidable that in some periods the inventory on hand is not sufficient to deliver the complete demand and, as a consequence, that part of the demand is filled only after an inventory-related waiting time. In an inventory optimization model, the amount of late deliveries can be influenced through the introduction of penalty costs (backorder costs) into the objective function. In addition to the optimal parameters of the inventory policy under consideration, from the optimal solution of such a model also the optimal size of backorders can be derived. Unfortunately, this optimization approach requires that the planner know the optimal value of the backorder costs. As these costs are difficult to quantify in practice, the logistical performance of an inventory node in a supply network is measured with the help of technical performance measures. The target values of these measures are set by the decision maker.

Several definitions of service levels are used in the literature as well as in practice. These may differ not only with respect to their scope and to the number of considered products but also with respect to the time interval they are related to. These performance measures are the Key Performance Indicators (KPI) of an inventory node which must be regularly monitored. If the controlling of the performance of an inventory node is neglected, the decision maker will not be able to optimize the processes within a supply chain.


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