Cycle Service Level in Supply Chain Explained
Cycle service level refers to the probability of preventing a stockout. The negative implications of a stockout can be lasting, so understanding cycle service level is mission critical when managing a supply chain. Let’s take an in-depth look at cycle service level, how it is calculated, and its importance to your bottom line.
What is Cycle Service Level?
Cycle service level is also commonly referred to as service level, and it is a metric that indicates the probability of having enough stock to meet demand (expressed as a percentage). For example, if a particular SKU has a service level of 70%, there is a 70% chance that demand won’t exceed the inventory on hand.
Properly managing service levels is essential to meet demand and maintain customer satisfaction. Stockouts lead to lost sales, and in the worst-case scenario, lost customers. However, these instances are preventable with optimal stock levels and well-managed inventory, which is where knowing your service level can help.
How to Calculate Cycle Service Level
There are many ways to calculate cycle service level, but we will highlight one of the simplest. There are two variables to take into account: the number of items sold in a completed sale and the number of items sold that did not result in a complete sale due to stockout.
The formula looks like this:
Cycle service level = (Number of items sold and supplied [Figure A] / Number of items sold and supplied [Figure A] + Number of items sold but not supplied [Figure B]) x 100
One benefit of this formula is that it can be used to calculate the cycle service level of every SKU, regardless of monetary value. As a rule of thumb, a higher percentage is better because it means more customers will have access to a product. However, is a 100% service level necessary for success? We cover that next.
Service Level Targets
It may come as a surprise that aiming for a cycle service level of 100% is not always advisable. Here’s why: to achieve a cycle service level of 100%, you often have to increase your safety stock, which in turn increases storage and stock management costs – especially if safety stock is miscalculated. In other words, without an efficient solution, achieving a 100% service level might require you to take on more costs, which offsets the financial benefits. Overall, we recommend aiming for a service level of 95% and higher.
In addition to safety stock, it’s important to take your sales strategy into account to determine your target service level. Product profitability is a crucial factor, also. Naturally, different items will bring in different profits and likely won’t have the same demand. Because of this, you’ll need to calculate different cycle service levels for each SKU. The goal is to allocate more resources to the products that have higher demand.
Cycle service levels indicate how well you can meet demand and how well your inventory is being managed. Efficient inventory management includes having just the right amount of safety stock safety stock, which will allow you to maintain the highest service level without incurring costs. To adjust and make corrections without worry, it’s beneficial to have demand planning software so you can rest assured that you won’t deal with stockouts or other surprises. Fill out our contact form today to see how our software can benefit your business.