Cycle service level represents the probability of not running into a stockout, that is, of not having enough stock to successfully deliver orders to customers by the agreed time.
In this post, we’ll define this concept and analyze the ways in which businesses strive to manage stock optimally with the aim of keeping their customers happy at all costs.
What is cycle service level in logistics?
The cycle service level, also known simply as service level, is an indicator of the probability of having enough stock to meet demand. Thus, if the cycle service level of a certain SKU is 90%, there’s a 90% chance that the demand for that product won’t exceed the available offer. In other words, theoretically speaking, 90 out of 100 customers will see their demand met within the anticipated timeline.
In this sense, this concept is closely linked to customer satisfaction, since high service levels will ensure that the demand created is fully covered. That is, most customers who want to buy a product will be able to find it and purchase it.
Likewise, this parameter is directly related to optimal stock levels and inventory management. This is because proper resource administration is indispensable for guaranteeing appropriate stock levels and avoiding a stockout of a SKU. That, of course, would mean not being able to fulfill certain orders, which would most likely cause customers to resort to the competition to find that item.
Cycle service level formula
Although many complex equations can be used, a simple way to calculate cycle service level is by taking the number of items of a SKU that were sold and the number of items that couldn’t be sold due to lack of stock:
Cycle service level (%) = [(No. of items sold and served) / (No. of items sold and served + No. of items sold but not served)] x 100
We should note that this cycle service level formula gives equal importance to all products: a company can use it to calculate the cycle service level of all its SKUs, regardless of their monetary value. However, some businesses will want to take into account that value to provide a better cycle service level for their more profitable products.
Let’s take as an example a shoe manufacturer who wants to calculate the cycle service level given for one of its SKUs over a specific period of time (one year in this case). To do so, it considers the number of units sold during that period (4,100) and those that couldn’t be supplied despite an existing request from a company (300).
To calculate it, all the company has to do is apply the formula described above:
- Step 1. Add up the items sold and those not supplied (4,100 + 300 = 4,400).
- Step 2. Divide the units sold by the result obtained in Step 1 (4,100 / 4,400 = 0.93).
- Step 3. Multiply that number by 100 (0.93 x 100 = 93).
Based on this formula, the cycle service level of that shoe is 93%. This high percentage means that customers will almost always be able to purchase that model.
Cycle stock level and safety stock
Each company has to decide for itself what its cycle service level should be and when to offer it (for example, during the Christmas holidays, Black Friday, or in peak season). To guarantee a sale, you need the right products in the correct quantities and at the right place and time. In this vein, having a large number of items in stock will put you in a position to serve a similarly high number of customers.
So, is it advisable to shoot for the highest possible cycle service level? Not necessarily. In fact, although setting a service level close to 100% might seem like a completely reasonable objective, this decision could actually be counterproductive for the company. Raising the cycle service level also calls for increasing your safety stock, which entails a rise in storage and stock management costs.
The truth is, the cycle service level a company establishes for its various SKUs will depend on several factors. One of the most relevant of these is the sales strategy. Organizations that lay down a cycle service level of 95%, for instance, usually do so because the ability to satisfy its customers at practically any time is a decisive variable in their customer loyalty policy.
Another factor to take into account is product profitability. Logically, not all items bring in the same profit, nor do they have the same demand level. As a result, different cycle service levels will be defined for each SKU. The SKUs in the warehouse should be properly classified to be able to allocate more resources to better-selling products, which will be assigned a higher cycle service level. To conveniently categorize items, companies usually employ the Pareto principle or the ABC analysis (20% of the products in the warehouse generate 80% of the sales).
Software for determining cycle service level
At this point, we’re faced with the question: How can I adjust my safety stock to deal with any unforeseen incidents and provide the best cycle service level? The answer lies in demand planning: data that provide the company’s sales history, for example, allow you to identify times of the year when more orders are dispatched and, thus, there’s more movement in the warehouse.
A warehouse management system will enable you to carry out strict inventory control and monitoring of prepared orders. Nevertheless, it’s also a good idea to make use of a specific tool that analyzes data on movements in the facility. In the case of Easy WMS — the WMS from Mecalux, this functionality is performed by the Supply Chain Analytics Software module. This solution incorporates KPIs on everything that happens in the warehouse to facilitate decision-making.
This module has an accuracy panel designed to carry out an exhaustive analysis of order preparation. Among the various indicators is one that’s extremely useful for calculating cycle service level: the ratio of orders dispatched vs. those ordered by customers.
Cycle service level: a key factor for logistics efficiency and customer satisfaction
As seen above, there’s a delicate balance between the advantages of aiming for maximum customer satisfaction and the risks associated with guaranteeing the volume of stock required to reach that goal. In that respect, the cycle service level is a vital logistics parameter that helps to optimize warehouse operations, procurement strategies, and stock management — all this with the objective of supplying customers without delay.
At Mecalux, we have considerable experience devising logistics solutions for all types of businesses. Our storage and warehouse management systems enable companies of all sectors to ensure maximum efficiency of their supply chains. And this, in turn, allows them to provide excellent customer service. If you think the time has come to take your logistics to the next level to improve your company’s customer service, get in touch. We’ll help you find a solution tailored exactly to your needs.