The cycle service level is a metric that tells you the probability that your warehouse won’t run out of stock, meaning there won’t be enough stock to fulfill orders. Understanding the concept and analysis of ways businesses are using to calculate cycle service levels and a number of other related issues will help you have some practice to apply in your business. This is really important because it helps businesses improve customer satisfaction and optimize inventory management to increase revenue.
Definition of the cycle service level
Cycle service level, also known as service level, is a metric that represents the probability that a retailer or business will supply enough stock to meet market demand. For example, if the cycle service level of a particular SKU is 85%, there is an 85% chance that demand for that product will not exceed stock availability. Simply put, 85 out of 100 customers will be able to see that their need for purchase will be met in a timely manner as expected.
Therefore, the service level will go hand in hand with customer satisfaction. Because everyone who wants to buy something wants to find it and buy it right away. And no one will be really happy when they have to wait longer than they need to get the product in hand.
At the same time, cycle service levels also represent optimal inventory management and inventory levels. This parameter will help you see what will be an appropriate percentage for your inventory, ensuring the right amount of stock.
The formula for cycle service level
The simplest way to calculate cycle service level is based on the number of items that cannot be sold because of a shortage and the number of items of the SKU that have been sold.
Cycle service level (%) = [(Number of items sold and serviced) / (Number of items sold and serviced + Number of items sold but not served)] x 100
The cyclical service level has the same effect for all products: no matter what the monetary level of the product, a business can use the service level formula cycle to calculate. In some cases, some businesses will include this parameter to improve the offering of products that are more profitable for them.
A specific example will make it easier for you to visualize. A shoe business wishes to charge its full-cycle service for a given SKU in one year. To calculate the full-cycle service level, we will need the number of units sold by the company within a year (3,800) and orders that cannot be sold due to shortages (400).
We will apply the cycle service level formula mentioned above to calculate the following:
Step 1: Add the two components that are products sold and items that cannot be supplied: 3,800+400=4,200
Step 2: Divide the number of products sold by the result we have just obtained: 3,800 / 4,200 = 0.91
Step 3: Multiply the last result by 100: 0.91 x 100 = 91
So, the life cycle of that SKU product is 91%. This number shows that the customer’s need is almost always met to buy that product.
Fill rate vs Cycle service level
Each company will need to calculate and figure out its cyclical service level and when it will need to deliver it, for example on days like Black Friday, Christmas, etc. To ensure smooth customer service, you need to ensure the right amount of product, at the right time and place. Accordingly, having a large number of goods also means that you will need a large number of customers to consume all your goods.
So, should the cycle service level be increased, so that it is always close to 100% or not? Unnecessary. In fact, having a high cycle service rate means you have to increase your safety stock, which leads to increased inventory management and storage costs.
A cycle service level for different SKUs will depend on a number of factors. The most important and influential factor is the sales strategy.
Product profitability is also another factor to be considered. Commercially, there are products that will be more profitable than the former for various reasons. Therefore, each different SKU will have commensurate cycle service levels. SKU products need to be properly stocked, allocate more resources to products that will be more profitable and have a higher level of cycle service. To make sorting items convenient, companies often use the ABC principle (20% of products in stock generate 80% of sales) or the Pareto principle.
Cycle service level determination software
Demand planning will help businesses adjust their safe stock to cope with any fluctuations in market demand and ensure high customer satisfaction rates.
A warehouse management system is an effective tool for monitoring standards as well as checking goods in the warehouse. In addition, you should also use a tool that allows you to analyze data about the movements of goods in the base. WMS software from Interlake Mecalux will be a suggestion for you. Using this software, you will have the ability to manage your goods thanks to the Supply Chain Analytics Software module.
This module will summarize for you an accurate report of the important parameters that you need to know during the warehouse operation. These include the ratio of orders shipped to the number of orders placed – very useful for calculating full-cycle service levels.
The cycle service level: an important aspect of logistical
In the logistics system, the most important thing that needs to be optimized is to ensure that the quantity of goods in the warehouse is always at an appropriate level, meeting the needs of customers. Cyclic service levels again have a big influence in this regard. A business that has a good cycle service level will show that they have a reasonable preparation of goods, thereby helping customers to be more satisfied when using business services.
Businesses often use software to gain experience in providing logistics solutions for specific types of businesses and goods. This brings many benefits to you in terms of customer satisfaction, optimization of inventory management as well as investment funds being used properly.
In general, the cycle service level adjustment will depend on many factors such as market demand and the value of a particular product. What businesses need to do is research and make appropriate decisions regarding the number of goods entering the warehouse. And to make this easier, you can use software that has built-in cycle service level capabilities. Hope you have a good time with Efex.