In supply chain, the service level defines the probability of not hitting a stock-out during the next ordering cycle. However, the fill rate defines the fraction of the customer demand that will be properly served. Service levels and fill rates are distinct, and should not be confused.
Often we take for granted the fact that you will be able to walk into a store and for an item to just be sitting on the shelf there, waiting for you when you need it. With huge catalogues to keep track of, fill rates and service levels are two of the most common tools that supply chain managers rely on to keep track of whether they are fulfilling their customers’ needs.
However, despite their relative simplicity to implement, service level is often mistakenly confused with fill rate, and vice-versa, despite the two indicators being numerically very different. In this episode, we clarify exactly what they are and find out which tool is the best to apply to prevent stock-outs.
As always when it comes to measuring how happy customers are, there is a certain “vanity metric” that can get in the way. Many managers are content to keep thinking they are doing well rather than really scrutinising their approach in detail. We discuss if there is a better way of measuring how demand is fulfilled and how easy it is for a company that has been using these metrics for a while to change from their current approach to a new, more efficient one.
Finally, we learn how to identify what is a good service level or fill rate and explore how companies can use this to keep their customers satisfied. It’s a highly complex question and, contrary to popular belief, 100% is not acutally the best service level or fill rate percentage that managers should be aiming for.
00:30 Perhaps a good place to start would be if we define what service level and fill rates are and the key differences between them?
02:03 Do you have an example to explain this?
03:59 How do you know what is a good fill rate, or what is a good service level that you should actually work to obtain? What is the percentage you should be choosing?
05:21 How does the service level actually work in practice?
09:35 It sounds like the methods can be fairly simplistic. Is there a way we can better illustrate the problem?
13:36 Is there anything out there that is even better than fill rate that we should be measuring?
16:36 Let’s go back to the Ikea example. How do those economic drivers work in that example?
19:16 With the economic drivers approach, there are still going to be personal opinions involved. Who is to say that this approach is any better than just using service levels or fill rates?
23:34 Why are supply chain managers still very loyal to things like fill rates? Why are they still using them?
27:14 How easy is it to change approach and switch towards an economic drivers approach instead? What are the first steps?