Supplying the distribution channels with products is one of the obsessions of all companies. It is also a vital need, because without making the product available to the customer we will have a very difficult time buying it. For this reason, studying and analyzing the service levels of your products is a critical factor in providing good customer service and doing so efficiently.
The level of service can be defined as the number of orders that we are able to satisfy in a timely manner. Often the service level is also identified with the probability that a product is not out of stock. In any case, it is clear that the level of service tells us about the level of availability of our product that we give to the client. And it can be measured in time -what percentage of the time it is available-, in number of users -how many of those who wanted to buy it were able to do so- and in units -how many we were able to sell out of the total demanded-.
Rethink service levels
Not all of our products are the same. Some sell more, others are very profitable, others are sold very sporadically… And, ultimately, no two products provide the same profitability to the company. Although it is very tempting to believe that the ideal is to guarantee a 100% service level for all products, it is advisable to consider what the ideal levels are for each product or group of products.
To understand the different importance of each product we can go to the Pareto principle. This theory maintains that normally, 20% of a company’s products account for 80% of its sales and/or profits. The key to this principle lies not in the fact that this 80-20 distribution is always exact, but in the existing tendency for a smaller part of your product portfolio to produce a large part of the sales and/or profits.
Accepting this theory as true, would it make sense to grant the same level of service to our flagship product and to the one that contributes the least in our catalogue? Also, especially when we consider that increasing the level of product availability has diminishing returns. In other words, it is much more expensive to go from 94% to 96% service level than from 80% to 82%.
A simple trick to help you in your approach
A quick way to catalog your products and their needs is to draw a grid in which one axis is sales volume and the other axis is product profitability.
Depending on where our products are located, we can follow different lines of action:
Low profitability and low demand
In this case, it is obvious that we are facing the worst products in our catalogue. The fact that they sell little and at a lower margin accentuates the costs associated with their level of service. Keeping it in stock is more complex, due to the greater difficulty in anticipating shipping needs, and its storage cost -either for your internal logistics or for your distribution channel– is high due to its low level of turnover. Similarly, you will not have the same cost efficiency when shipping packages as when shipping pallets.
It is important to analyze the possible convenience of discontinuing these products, if necessary, and it is difficult to justify demanding a very high level of service from them.
Low profitability and high demand
The number one task in this situation is to make the processes more profitable. We already have a high demand, which makes the supply more demanding. Therefore, the key in these cases lies in reviewing both the logistics process and the manufacturing of the product itself, in order to increase its profitability as much as possible. In these cases of high demand, low service levels can mean the loss of many sales.
High profitability and low demand
Despite the fact that its demand is lower -increasing, as we have seen, storage costs- there are products that will continue to be very profitable for the company. These cases are very prone to concentrating their inventory in central facilities or warehouses, from which they supply purchase demands through express services. This process is more efficient than having very few copies spread out in nearby stores or even at points of sale to meet these smaller purchase volumes, since this demand may never arrive or may do so every too long.
In the case of an ecommerce, it could be those products that we see that have a longer delivery time than the rest; They will not have the same level of service as other products in the catalog -with a shorter delivery time– but you can buy them.
High profitability and high demand
The crown jewels. That small percentage of star products that the Pareto principle tells us about. Therefore, they will be the products in which we have the greatest interest in maintaining the highest possible level of service. Contrary to the previous point, here the strategy to follow involves ensuring its supply in the shortest possible time, bringing the point of supply as close as possible to the point of sale (for example, with local, regional or national warehouses, depending on of the scale to which we move).
How much do we lose in the event that this lack of stock occurs?
These rules can help you, but you must always keep in mind that their application should not be automatic. We have to study case by case and analyze the possible peculiarities to determine the optimal service levels and even the possible discontinuation of products. Let’s imagine that our company is dedicated to distributing DVDs and that, among them, there is a section of classics and old films. It is possible that the latter are not the ones that contribute the greatest number of sales or the greatest profitability, but it may be that having this catalog is a strategic decision to position our company, assuming that lower profitability.
When talking about service levels it is important to take into account the opportunity cost. That is, how much do we lose in the event that this lack of stock occurs? How many customers have not bought? How many units have we not sold? How does that affect our brand and our relationship with the customer and with the distribution channel? We need to assess this data and its impact in order to know the levels of service that we want to demand of ourselves and the costs that we are going to assume.