A demonstrated customer service level does not have to be restricted to the safety stock service level percentage. Expediting can maintain a high customer service level in spite af a permitted stockout if the company is prepared to expend the extra effort to shorten the normal stockout duration.

By Paul Bernard CFPIM, CIRM

It is not uncommon for a company's demonstrated customer service level (CSL) to exceed the safety stock service level (SSSL) percentage set within an inventory system. When this happens, it is not a mistake, but rather the result of a proactive customer-oriented inventory strategy. In fact, if the CSL is less than the SSSL percentage (see Figure 1), there is probably something wrong.

Companies should be able to achieve an equal or higher CSL than an inventory system will indicate is possible via the SSSL percentage field. The difference is related to what the company does to prevent a stockout, and to rectify a stockout after one occurs.


Customer Service: Constraint vs. Measure
Inventory management personnel occasionally use the SSSL percentage and the CSL terms interchangeably. This is not surprising. The two terms seem equivalent until the proper descriptors are added. Using them interchangeably can lead to confusion, since the first term refers to a minimum performance constraint, while the second is a performance measure. The confusion is that, while their values may at times be the same, they do not necessarily have to be at all times.

For example, a 100 percent SSSL percentage provides a 100 percent CSL by definition. However, a 0 percent SSSL percentage (no safety stock) may still provide a 50 percent CSL on average. Therefore, the SSSL percentage can, and most likely will, drop at a faster rate than the CSL. When this occurs, customers receive a higher level of service than the quantity of safety stock would indicate.

The minimum performance constraint term is the SSSL percentage. This is a field set by the planner to calculate a statistical safety stock. It establishes the maximum number of stockouts permitted within a given number of replenishment cycles (i.e., the minimum number of times that no stockouts will occur). The SSSL percentage is therefore something which is established as a minimum target. The performance measure term is the CSL. It is calculated by the system based on demands satisfied on schedule as a percentage of total demands. The CSL is something which is achieved as a result of the total performance of the organization.

As an example, consider a part where the planner has observed a difference between the two service levels. A 99.5 percent CSL is being achieved based on demands satisfied as a percentage of total demand, even though the part is expected to experience a stockout once every 20 order cycles due to a 95 percent SSSL percentage being set. In a situation like this, the tendency may be to reduce the SSSL percentage based on the erroneous conclusion that safety stock levels are higher than they need to be. The planner may believe that if the demonstrated CSL exceeds the SSSL percentage, perhaps setting a lower SSSL percentage will suffice in providing an adequate level of service. In this example, there is 4.5 percent (99.5-95.0 percent) to play with by reducing the safety stock quantity.

While this has the effect of saving some money in safety stock inventory, the effect on service and total cost may not be as expected. There is no direct correlation between the two terms except under ideal conditions. In this particular example, it is clear that the two terms are not directly correlated since the two percentages are not the same. Also, reducing the CSL is not an action which is likely to be looked on favorably by the company's internal and external customers.

Managing the CSL requires an understanding of the purpose and interrelationship of the two terms. This understanding can then be translated into a strategy for achieving the Target CSL while minimizing the safety stock quantity.


Safety Stock Service Level
The SSSL percentage is set by the planner for each part. It establishes the number of times the part is permitted (expected) to stockout as a percentage of the total number of replenishment cycles. For example, setting the SSSL percentage to 98 percent indicates that, at most, one out of 50 replenishment cycles may experience a stockout. For a part replenished once per week, this is approximately one stockout per year. For a part replenished once per month, this is a stockout approximately once every four years. The relationships are determined via statistical means and are based on an assumption of the past being an indicator of the future.

Once set, the SSSL percentage is used to calculate a statistical safety stock. The percent is related to the standard or mean absolute deviation which is recalculated on a periodic basis (see Figure 2). For example, consider a part with a forecast period equal to the supplier lead time of one month. Setting the SSSL percentage to 90 percent with a part standard deviation of 10 units enables the safety stock quantity to be calculated as 13 (1.28 × 10, rounded up). This means that the deviation of the forecast from actual usage will be less than 13 in as many as 9 out of the 10 periods. Some periods, in fact, will likely not experience a shortage at all. However, one period out of the 10 is likely to consume the safety stock of 13 and result in a stockout.

If the supplier lead time is greater than one month, a commonly used lead time deviation factor is used to multiply the previous result by (supplier lead time/forecast period)0.5. For a four-month supplier lead time where the forecast period is monthly, the result is 26[13 × (4/1)0.5]. The 0.5 portion is referred to as the beta factor. Since it is unlikely that the part will remain stocked out for all four months, a beta factor less than 1.0 is typically used. A value in the 0.5-0.7 range is common, with 0.5 being the most common since it is the square root. The issue for the planner is the length of time the company can absorb a stockout. The shorter the time duration, the higher the beta factor.

The higher the SSSL percentage, the greater the number of standard deviations covered. With statistics, no amount of standard deviations ever reaches the 100 percent level. Figure 1 shows that with business math, the planner needs to designate a point at which 99.99+ percent is rounded up to 100 percent for practical purposes. Therefore, four standard deviations of coverage is equivalent by definition to a 100 percent SSSL percentage in this case. This results in a safety stock equal to 80 units (standard deviation[10] × safety factor[4] × lead time deviation[4/1]0.5). With the part, carrying 80 units of safety stock should ensure that the part never stocks out.

The planner can base the 100 percent safety stock coverage decision on historical usage levels for the part; it does not need to be a guess. High quantities of safety stock are obviously most cost effective with less expensive parts. However, cost is not the only consideration when it comes to safety stock. Service level is also important.


Customer Service Level
Whereas the SSSL percentage is set by the planner, the CSL is calculated based on demands satisfied/total demands. It is a measure of a company's ability to satisfy customer demands given the current business environment and related inventory strategy. Therefore, CSL is truly a measure of the company's performance, while the SSSL percentage is simply a variable set within the statistical safety stock set of equations.

In order for the CSL and the SSSL percentage to be the same, the relationship between days stocked out per period and demands satisfied out of total demands per period must be the same. The simplest case is when:

1. The usage rate is evenly distributed throughout the time frame; and

2. The days stocked out reflects the difference between the SSSL percentage and 100 percent. If, for example, the SSSL percentage is set to 98 percent for a part replenished on a weekly basis, the stockout duration must be 2 percent (100 percent-98 percent), or one week.

With these two conditions, a total steady demand rate of 100 per week will be satisfied for 49 of 50 weeks in terms of the SSSL percentage, and 4,900 out 5,000 demands in terms of the CSL. Any similar combination where the percentage of days stocked out and the percentage of demand filled are equal satisfies the ideal relationship. However, this is not the normal situation in a company where demand varies.

Consider the scenario in Figure 3. One of the three replenishment periods had a stockout. This is a 67 percent SSSL percentage. However, in spite of the stockout, the timing was such that the company was able to satisfy 13 of 14 demands during the same time frame. This resulted in a 93 percent CSL. Therefore, while the number of stockouts within a given number of replenishments is important, the duration of the stockouts and timing of demands may be even more so. In this case, the stockout duration was only long enough to affect one demand. Therefore, the shorter the stockout duration and the fewer the number of demands during that time period, the higher the CSL.

Achieving Balance
Shortening the stockout duration is a key to improving the CSL performance measure. To facilitate this, expediting should be part of any customer service strategy. Also, if no demand occurs in a stockout period, or if some of the demand can be satisfied via use of substitute parts or rescheduling, the CSL will not drop to the SSSL percentage.

Statistical safety stock and forecasting calculations do not constrain a company from taking proactive actions to protect their CSLs if actual usage rates and deviations do not conform to the calculations. It is also an inappropriate tactic to reduce safety stock levels in order to reduce the demonstrated CSLs to what is typically a somewhat arbitrary SSSL percentage. The SSSL percentage is the minimum CSL constraint, not the target.

Copyright © 2020 by APICS — The Educational Society for Resource Management. All rights reserved.

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