To perform well on the order and order‐line fill rate measures requires good service on a wide spectrum of SKUs, including slow‐moving and intermittent items. The unit fill rate is an important measure as it can be applied straightforwardly at both the aggregate and SKU levels. For an individual order line, the value fill rate is the same as the unit fill rate, but these measures may differ when calculated for a whole order, as illustrated in Table 3.1. Full satisfaction of the most expensive order line, for SKU D, has resulted in the value fill rate, of 85%, being somewhat higher than the unit fill rate of 72%.
Although complete order fulfilment is ideal from a client perspective, the percentage of orders completely filled should not be the only service level measure. Retailers usually submit numerous order lines in an order on a wholesaler. Even if the wholesaler improves the availability of stock, this will not necessarily be reflected by the complete order fill rate. For example, if the order lines for SKUs A, B, C, and D were filled completely but only four out of five units were filled for SKU E, then the order would still be counted as unfilled. The order‐line fill rate and the unit fill rate would be raised to 80% and 96%, respectively, thereby reflecting the improved stock availability.
The measures discussed here may be embedded in a broader framework of order fulfilment metrics. Johnson and Davis (1998) described how Hewlett‐Packard augmented inventory holding and fill rate metrics with a measure of customer delivery reliability. This helped to identify the impact of stockouts on delivery delays, including some cases where there was no impact because non‐available stock became available in time for the dispatch of the last truck.
3.3.3 Relationships Between Service Level Measures
Occasions may arise when an organisation needs to change from one service level measure to another, and new service level targets are required. If service levels have not been monitored according to the new measure, then a relationship between the old and new measures can help to set new targets. Boylan and Johnston (1994) showed how relationships may be obtained between order‐line and order fill rates, and between unit and order‐line fill rates. The relationship between the unit fill rate,
where
Equation (3.1) is useful when the original calculation cannot be performed. This situation can arise when backorder (BO) records are maintained but data is not retained on the quantity filled for each order line. Boylan and Johnston (1994) described such an application at Unipart, a large UK‐based manufacturing, logistics, and consultancy company. In this case, new unit fill targets were determined, based on old order‐line fill targets. This was done separately for each of the company's major logistics clients and for each of the movement classes (fast, medium, and slow moving automotive spare parts) and led to a smooth introduction of the new measure.
3.3.4 Summary
In this section, we have stressed that aggregate service and financial targets both need to be attained. Aggregate service level measures may be recorded at order, order line, or unit level and monitored accordingly. It may be beneficial to use more than one measure, so that service can be assessed from a variety of perspectives. If there is a need to convert from one measure to another, then relationships are available for this purpose. In all situations, it is important to gauge the financial implications of hitting service targets, to ensure that the targets are set at an appropriate level.
3.4 Service Measures at SKU Level
Financial and service performance at the aggregate level are ultimately determined by the performance at SKU level. In this section, we begin with a brief discussion of financial measures, before moving on to potential service measures, at the level of the individual SKU, and when they may be most appropriately applied.
3.4.1 Cost Factors
Inventory holding costs can be assessed at SKU level based on the opportunity cost of capital, warehousing space costs, costs of potential pilferage and spoilage, and costs of stock obsolescence. Of these components, the opportunity cost of capital is generally the largest. Gardner (1980, p. 43) remarked on the difficulty of assessing the cost of capital, describing it as: ‘…a highly subjective measure, which depends on the risk environment of the firm and management goals for rates of return on investment’. The difficulty of measuring inventory holding costs is well recognised, although there may be benefits of organisations thinking through these costs as thoroughly as they can.
The costs of stockouts can be assessed at SKU level, based on a penalty cost for backordering and the delay of fulfilment of an order line for a period of time. As mentioned in Chapter 2, there are two ways of estimating these costs. There can be a fractional charge of the unit cost per unit short (regardless of the duration of the stockout), or there can be a fractional charge per unit short per unit time. Both approaches suffer from the difficulty of making
