The power of service levels on profitability
“I need a 100% service level” – a typical expectation of both management and commercial departments. Purchasing & operational divisions however, have a much better understanding of service levels and appreciate that attaining 100% is a utopia. In practice, determining an appropriate service level is an extremely complicated undertaking.
OPTIMISE YOUR SERVICE LEVELS
For many businesses, the criteria for setting service levels is unclear and as a consequence, service level targets are set as a given figure (based on a quick and vague analysis). Furthermore, the quality of the service level is difficult to measure as the effects only emerge after a certain period of time. It is only when an inappropriate service level has a negative impact on safety stock inventory for example, that the service levels are reviewed and quickly adjusted (without any real analysis). Thus, service levels are not reviewed regularly. Should this worry you? Only if you think that service levels are a powerful instrument that have the potential to impact both your profit margins and overall business performance.
Do service levels really have such a powerful influence on your margin? And can a well-thought out service level provide your organisation with a valuable asset?