Service Level – Purpose, types of target measures and assumptions
Intentions for measurement of service level
Measurement of service levels is a topic that most players are concerned with and are an important element in the relationships between supplier and customer.
The parties are free to agree whether to measure the degree of service.
If the parties agree to establish an agreement, STAND recommends that STAND’s definitions be used.
A challenge in relation to the exchange and evaluation of service level data has been that the trading partners often use different definitions and conditions for measurement and follow-up.
The recommendation contains suggestions for target measures and common definitions for measuring service levels. The purpose is to establish a common platform as a basis for measurement, communication and mutual evaluation of performance.
Joint exchanges of measurement results, based on the proposed definitions, could contribute to improved service levels and contribute to increased understanding of the parties’ views on customer and delivery services.
Target measures are based on DLFs (Dagligvaruleverantörers Förbund) and DULOGs (Dagligvaruhandelns Utvecklings- och Logistikgrupp ) common definitions, established in Sweden in 1998.
With this as a base as well as experience from companies with international relations, the prioritized definitions build upon the need for common understanding, measurement and evaluation of cross-border service.
With continuous follow-up, development and trends can be monitored over time. This will probably be more interesting than single results. Greater trend deviations are when warning signals and improvement programs should be implemented to reduce the likelihood that a similar situation will arise in the future.
The recommendation describes 6 different target measures, of which STAND recommends that 3 of these are prioritized, as these can be quickly implemented in today’s systems.
Other target measures are composed of different combinations of priority targets.
Selection of target measures is done by the parties themselves and described in bilateral agreements.
The industry has an increasing focus on improving the service level to consumers, ie reducing out-of-stock in the stores. This is currently being worked on, including developing agreed definitions of how this should be measured and followed up. The following two KPIs can be used:
1. Lost sales:
When stock is zero at the end of the day, this will be set off against lost sales in the store.
Example: You have sold 40 during the day, and at the end of the day, the stock is zero. If this item had a sales forecast of 100 that day, the shelf service level of this item would be 40%.
When you aggregate this to store level, we will get a figure of how many customers were actually affected (based on the forecast) by the empty shelf.
2. Empty shelf
Number of article lines / products with stock = 0
Empty Shelf = ———————————————- ———————-
Number of article lines / products in the assortment in total
Assortment is defined as what purchasing / category management has decided.
Deviations between what the individual store has in their space program, and the defined assortment for the store may have to be measured with a separate key figure; assortment loyalty.
For the reports, inventory = 0 means that inventory is 0 or less than zero in the store’s systems.
Other priority target measures:
- Correct quantity
- Correct time
- Correct administration
Combined target measures:
- Delivery of Order – Availability
- Complete orders at the right time
- The perfect order
The target measures can be used by both the customer and the supplier for follow-up of each other’s performance.
Prerequisites for target measures and definitions
In the measurements, the unit of measurement is described as “sales unit».
It is recommended that Stock Keeping Unit (SKU) is used as a sales unit. Stock Keeping Unit (SKU) is established in most systems and is the base for transactions; ex. ordering, delivery, billing etc. to the store.
Consumer Units (CU) as a unit of measurement, however, should be the vision and goal of the future, as the Consumer Unit (CU) is the unit of measurement that is uniform and shared throughout the value chain.
Agreement on measurement of service level
Which target measures to use and what definitions should apply should be anchored in a bilateral agreement.
The agreement can regulate conditions such as:
- Lead times
- Time frame
- How the exchange of measurement results should take place
- Where and when the measurement should take place for the measurement points associated with the priority target measure “Correct time»
- Duration of measurements. In choosing definitions, the parties must agree on the degree of service to be calculated over time or in relation to a contracted number of orders