Desired service levels

Logistics—If a company is geographically located such that it can not meet the desired service level and deliveiy requirements of its customers, tolling may provide a local production and distribution site. Shorter transportation routes for hazardous chemicals or wastes may also be a consideration. 

Critical to understanding customer satisfaction and perceived service quality is a clear understanding of expectations. Expectations are internal standards used by customers when evaluating a product or service. While they may initially influence a decision whether or not to purchase a product and from whom, they also play a critical role in consumers judgments of service quality and satisfaction. Conceptual models have suggested that expectations consist of several different elements desired service level, adequate service level, predicted service level, and a zone of tolerance (Zeithaml, Berry, and Parasuraman, 1993 see also Parasuraman, Zeithaml, and Berry, 1994a). 

The desired service level can be elevated or lowered based on personal needs and enduring beliefs about what is possible. The adequate service level can be influenced by a number of factors, including the perceptions of service alternatives and situational factors (e.g., emergencies and catastrophes). Explicit and implicit promises made by the service provider, past experiences, and word-of-mouth communications are proposed to influence the desired service level directly and affect the adequate service level indirectly through the predicted service level (Zeithaml, Berry, and Parasuraman, 1993). 

Fixits accounting group has estimated that the annual holding cost is 20% of the cost of the product . Acme supplies a case of widgets for a price of 15 per pack. Assume a desired service level of 95% and a current safety stock of 1 day of inventory at Pittsburgh to counter delivery lead time variation. The cost for a truckload shipment from Seattle to Pittsburgh, by third-party carrier, is 3,000. 

But to make VMI economical, the manufacturer may have to pool dehveries across multiple retailers to optimize costs associated with frequent delivery. In addition, VMI may require the manufacturer to have access to detailed outbound retail shipment information in order to lower manufacturer forecast error and decrease safety stock at the retailer DC required to maintain the desired service level. 

Enns tests the performance of this policy via simulation under various sequencing rules. As performance measures, he looks at the percentage of tardy jobs, and deviations from the desired service level (PTAE). He finds that (1) the performance of the proposed due date setting policy is affected more by the utilization level and the service level requirements than the sequencing policy, (2) due-date dependent sequencing rules in general outperform non-due-date dependent rules, especially for high service level requirements and as utilization increases. 

What this highlights is that, as the desired service level rises, it takes a disproportionate investment in inventory to aohieve small incremental improvements in availability. The table below illustrates this effect ... 

Desired service levels stipulate the degree of stock-out risk acceptable to management. 

Because products tend to deform in time at a decreasing rate, the acceptable strain based on the desired service life of the product is determined. The shorter the duration of load, the higher the apparent modulus and thus the higher the allowable stress. The apparent modulus is most easily explained with an example. As long as the stress level is below the elastic limit of the material, its modulus of elasticity E can be obtained from the usual equation ... 

Let Hh denote the total material balances in ascending order Vhm nj/h) and ph, the associated probability vector. For a given total safety stock level along the pipeline r, the a-service level of the pipeline storage system is defined by Ph(,) with / determined such that r > and r < To define a safety stock level satisfying a desired... 

Table 4-15 reveals that the baseline configuration is not dominated by the optimal configuration (due to the maadmum fi-service level) but total cost are 8,995 . In contrast, the simulated total costs for the optimal configuration account for only 5,266 per day which is approximately 5% below the estimate based on H (x ). However, this comes to the cost of a reduced reliability of the inventory system as the simulated fi-service level (98%) is smaller than the desired 99%>. In practice, it is probably advisable to round up the optimal parameter (as shown in Table 4-14) to a desired accuracy (e.g. whole hundreds or thousands). 

Step 4 Identify facility requirements. Facilities need to be tailored to achieve the desired objectives (e.g., products with high service level may require distribution warehouses located near the marketplace). 

The service level desired in this system is 90%, which means that safety stock adequate to meet 1.282 standard deviations of demand on the warehouse must be carried at each warehouse. For example, if there is only one warehouse with a standard deviation of demand at the warehouse of283, then 283 1.282 = 363 units. The delivery time to the warehouse is 1 week. So, the required safety stock is added to the demand during the lead time to determine the reorder point (ROP) for each warehouse. For example, when there is one warehouse, the ROP becomes 8,000 + 363 units or 8,363 units. But, this is less than 1 truck load (LTL), which means the warehouse would have to pay higher transportation costs. 

A less rigorous approach to finding a (Q, R) solution would be to solve for Q and R separately. Note that z = R - MoltV dlt gives a fractile of the distribution of demand over the lead time. Thus, we could set R to achieve a desired in-stock probability, along the lines of the newsvendor problem solution discussed earlier (i.e., to accumulate a given amount of probability under the DLT distribution). In this setting, the in-stock probability is typically referred to as the cycle service level (CSL), or the expected in-stock probability in each replenishment cycle. Specifically, for normally distributed lead-time demand, DLT, we set... 

Figure 23.3 shows each performance attribute and the needed "distance" to reach the desired BOC level of performance. Such an analysis is the foundation for devising supply chain solutions. As Wireless Services put it in their presentation, the exercise "defined the business problem."... 

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