Insight into internal processes
The advantage of a well-adjusted service level goes beyond margin increases as a thorough analysis also provides greater insight into your internal processes. By internal processes, we mean the processes that should mitigate both the supply chain factors and the demand chain factors.
A service level reflects your ability to meet demand and the capacity you are willing to use to satisfy this demand. If it is based on the right criteria, it should fit with your company’s strategy and the capacity of its processes. If your capacity is not based on the right criteria, it may not have the desired effects. This occurs because certain supply and demand influences are not taken into account and as a consequence, this can cause a margin decrease. In that case, simply increasing or decreasing your service level can make the issue even worse.
Your service level should be a reflection of your internal processes and the maximum profit they could possibly generate. From the service
level and its effects, we can derive:
- To what extent the internal processes can handle the service level
- What this process input means for every individual article
You should ask yourself which element you want to change; the inventory process or the service level. Either way, one should be adapted around the other. However, there is a risk that you adapt the wrong one, which can lead to a decrease in the quality of both elements. This, in turn, can have severe consequences!
In conclusion, the right determination of your service level can have a considerable effect on your margin, but it can also give you insight into the extent to which your internal processes and their capacity can be improved and aligned to your organizational goals.