Your customers often don’t know what material they’re going to need before they actually need it. As a distributor you stock material to fulfill these immediate requirements. How well your inventory provides what your customers want will, to a great degree, determines your success or failure as a distributor. When a customer calls and asks for a common stock item, is it almost always available? Or do you often find yourself scrambling, making excuses, and looking at a long list of backorders? Instead of guessing how often you are able to deliver what your customers want, when they want it, why not track your performance using to an accurate, easy-to-calculate measurement?
The customer service level is a good barometer of how well your are meeting your customers’ immediate needs. That is, your reliability as a supplier. It measures how often you have the items you’ve committed to stock, when your customers want them. Keep in mind that if you don’t have what your customers want, they must look for it elsewhere. Your competitors won’t have to make sales calls… your customers will seek them out! In this article, we will examine how to accurately measure your customer service level as well as the service goals you should strive to attain.
At the end of each month, the customer service level should be calculated, for each branch as well as the entire company, using the following formula:
Total # of line items ordered
Notice that we measure line items shipped complete. That is, the entire quantity ordered is delivered. If the customer orders ten, and we ship ten, we get credit towards the customer service level. But, if the customer orders 25, and we only ship 24 before the promise date, we get no credit. This is truly a pass-fail test. Why no partial credit for shipping 24 out of 25? Well, if the customer wanted 24, he or she would have ordered 24. They wanted 25! The customer may have to find that last one somewhere else. Can you guess where that would be? Your competitor!
When calculating your customer service level be sure to only include sales of stocked items that are filled using warehouse inventory. Do not include sales of other kinds of products such as:
Non-stock products – Items that you do not keep on hand, but are specially ordered to fill a specific customer order.
Direct or “drop” shipments – Material sent directly from a vendor to your customer.
Customer blanket orders – Orders taken far in advance of the required delivery date. Quantities of products to fill these orders usually can be special ordered from the vendor; warehouse stock is not used.
Shipments of these types of items do not reflect how well you stock material to meet your customers immediate needs. Companies that include non-stocks, direct shipments, and planned future orders when calculating a customer service level tend to overstate how well they are serving their customers’ day-to-day needs. Let’s look at an example:
Seventy per cent of XYZ Distributors business results from warehouse sales. The other 30% comes from non-stock items, direct shipments, and customer blanket orders. In June, XYZ invoiced 10,000 line items. The three thousand lines containing non-stocks, direct ships, and customer blanket orders were all shipped complete by the promise date. However, only 5,600 of the 7,000 line items filled from warehouse stock were shipped complete by the required date.
If all 10,000 line items are considered in the calculation of customer service level, then 8,600 of the 10,000 line items were shipped complete. The resulting customer service level is:
| 8,600 | or 86% | |
| 10,000 |
If only warehouse stock shipments are considered, the service level is much lower:
| 5,600 | or 80% | |
| 7,000 |
Eighty per cent of the time a customer ordered a stock item from XYZ, the order was filled from warehouse stock before the promise date. Looking at it another way, one of every five stock items ordered caused customer disappointment! XYZ didn’t have the items it had committed to stock, in sufficient quantity, to meet its customers’ needs. The late Alan “Buddy” Silver called these “painful backorders”… probably because it hurts to see your customers going down the street to get your “stocked” items from a competitor.
Most hard-goods distributors should strive to reach a 95% customer service level. This means that 95% of the time, you are able to completely fill orders for individual stock items before the promise date. Why not 100%? Well, even though it would be nice to always be able to meet your customers’ expectations, it would require a huge amount of warehouse inventory. Remember that:
- Predicting what customer demand will be is not an exact science. If you continually over-estimate upcoming demand, you’ll drown in surplus inventory. This is a problem encountered by many companies that practice SWAG (“silly, wild-ass guessing”) purchasing.
- Occasionally customers will order an unusually large quantity of a stocked item. You’re probably overstocked if you can always fill these atypical orders from warehouse inventory.
It would be hard for XYZ Distributor’s to improve their customer service level from 80% to 95% in a short period of time. Like so many other things in life that are worthwhile, improving a distributor’s customer service level isn’t easy. With a dedicated effort, XYZ should be able to improve its customer service level by 1/2 of one per cent each month until it reaches the goal of 95%. How? By improving its methods of inventory control (i.e. accurately tracking and maintaining the material in its warehouses) and inventory management (i.e. replenishing the right quantities of the right items). Will this take months or even years? Sure, but the sooner they get started, the sooner they’ll experience improvement and more satisfied customers!