Service level: it should be the clearest and most impactful KPI (key performance indicator) in any supply chain, capturing the ability of the supply chain to meet the company’s ability to satisfy their customers’ expectations. For many companies it is considered the ultimate performance measure and every other KPI – such as cost, inventory level or forecast accuracy – is either derivative, secondary or simply a means to the end of high service levels.
A closer look at this KPI reveals that calculating it and managing around it come with challenges, but nonetheless it can be a lever to improving the customer orientation in a supply chain organization.
More than meets the eye
The notion of service level has evolved over time for many companies. At its most basic, service level measures try to answer the question, ‘Did we ship the order on time?’ The debates within companies tended to revolve around details such as whether the measure should be by order line item or for order header.
Some companies would go further and look at the non-serviced volume in the order, in an effort to appreciate the extent of the service disruption. But the curious dynamics of service measures can lead to complications. Imagine a customer that orders 10 units three times a week, where the customer uses the common ‘fill-or-kill’ policy of cancelling non-serviced orders. If the customer’s order of 10 units on Monday is not fulfilled, the order on Wednesday will not be for 10 units, it will be for 20 units: the 10 units for Wednesday plus the 10 units that were ordered on Monday and not shipped. If the stockout persists until Friday, then the customer will not order 10 units as usual, they will order 30 units: the 10 units for Wednesday plus the 10 units not shipped on both Monday and Wednesday. A weeklong stock that should have impacted service levels by 30 units in fact resulted in an impact of 60 units of unfilled orders. The service level impact has been artificially doubled!
One global consumer goods company supply chain executive shared how a Class C SKU (stock keeping unit), a slow mover, was out of stock for three weeks and this dynamic of cumulative ordering managed to drag down his service level and raise alarms across the company. The service performance as expressed by the measure was so severe that he even had to explain to the highest levels of management that the service KPI they were seeing was not reflective of a serious problem.
There can be operational impacts as well. “I began to push for us to implement VMI [vendor managed inventory] with our key accounts,” he explained, “but not out of a noble desire to move our supply chain forward with best practices. It was because I wanted to exert some control on the order behavior when products were out of stock.”
The supply chain executive explained how some supply chain managers respond to these misleading results by removing orders for SKUs that are out of stock after the first order. In other words, after the customer has ordered the SKU once and not been satisfied, the SKU no longer impacts the service level KPI. The practice became so pervasive that it began to hide serious service issues, and the CEO of the company accused the entire supply chain management of bad faith and of attempting to hide its poor performance.
Another major consumer goods company attempted to resolve these issues by not integrating the escalating customer orders, but rather asked the commercial teams to enter into the company ERP ‘phantom orders’ that represented typical customer ordering patterns. Not surprisingly, this effort was not successful, since asking commercial teams to invest effort in keying in data to arrive at a robust KPI for a situation they find fundamentally frustrating is not a firm foundation on which to rely upon for accurate service measures.
One company told us how commercial teams would be reticent to inform customers of product discontinuations in order to delay product returns as long as possible. The result was that a customer, unaware that the product was no longer available, would continue ordering it and not be served, and the service level KPI became deeply corrupted in consequence.
The result of all of these dynamics is a KPI that does not drive behavior towards customer satisfaction, rather one that creates counter-productive internal friction and misunderstanding. But it can also set the stage for a company to resolve these issues by focusing more on customer expectations.