In many documents related to the Supply Chain and Manufacturing the issue of measuring customer service is discussed, and also in some documents several indicators are proposed to measure the Level of Customer Service and among them the indicator of “ Perfect Orders ", but, in particular, perhaps because it has not been properly investigated, I have not found any document that specifies how" Perfect Orders "or" Perfect Deliveries "are calculated or determined.
That is why this document explains a proposed calculation procedure for “Perfect Orders or Deliveries” (In English “Perfect Orders” or “Perfect Deliveries”). This document also proposes a procedure to determine the "Minimum Level of Customer Service", as well as the use of the Line Fill Rate indicator as a measure of weighting inventory turnover and in a way determining the quality of Inventories to comply with Customer Service.
MEASURING THE CUSTOMER SERVICE LEVEL (CSL):
In every manufacturing company, its main goal is to deliver the products to its customers in the quantities they requested, at the time and place they requested delivery and that only products that meet the established quality specifications and comply with the procedures of agreed delivery. The fulfillment of the total set of these requirements is what can be considered as a “Perfect Delivery”.
The processes / sub-processes for the fulfillment of customer orders, their results and their indicators are shown in the following table:
The Customer Service Level (CSL) can be measured with the following indicators:
- Order Fill Rate Line Fill Rate / Item Fill Rate On Time Delivery Quality of Delivery / Delivery Accuracy
The Order Fill Rate or Order Fulfillment: It is the proportion of the orders that were shipped complete, with respect to the total of the orders received:
The Order Fill Rate is suitable to use in the case of the Make to Order production strategy
The Line Fill Rate / Item Fill Rate or Fulfillment of the Articles: It is the proportion of the quantity of articles that were shipped to the clients, with respect to the total of articles ordered by the clients:
The Line Fill Rate is used in the Make to Stock production strategy
The "On Time Delivery" or Delivery on Time: It is the proportion of deliveries / shipments of product to customers that arrived in the agreed time, with respect to the total deliveries / shipments made to customers
The Quality of Delivery or Quality of Delivery: It is the proportion of the Quantity of Items that customers received and that did not have any problem in the reception, either the quality of the products or shipment documentation, with respect to the totality of items shipped to customers
The indicators explained above are those that are proposed to be used to measure a set of sequenced sub-processes, which is shown in the following figure, when this situation occurs, to measure the Total Effectiveness of the Process, a calculation procedure defined as
Representing the results of the process in the Process Performance Scale Model and considering the application of the Line Fill Rate for a Make to Stock situation we have:
Having identified the sub-processes, their sequence, their outputs and their indicators, and considering the conclusions of the Process Performance Scale, we can define the indicator of Customer Service Effectiveness, this indicator combines the other indicators that measure the Level of Customer Service (CSL), we call this indicator Perfect Deliveries:
In this case, the use of the Line Fill Rate and not the Order Fill Rate is considered since it is considered a situation of a Make to Stock strategy and is made consistent with the subsequent indicators of the process, thus all the indicators that define the Deliveries. Perfect consider the items that the customer ordered and the items that meet the requirements to be considered delivered in a perfect way. In a Make to Order situation, all indicators should refer to customer orders rather than ordered items
The Perfect Orders indicator measures the Effectiveness of the Supply Chain or of a manufacturing unit. Effectiveness reflects how well processes achieve business objectives. Effectiveness measures how well you get what you want.
“It does not matter how well the purchases and production are done, and any other function or process of the company, if the products cannot be sent to the clients in the times they require them and with the quantities and quality they require., then it will be having a poor Effectiveness ”(David A. Taylor, Ph. D. - Supply Chains a Manager's Guide)
Fulfillment of Orders receives the most attention: Effectiveness is a concern for all processes involved in replenishment, production and fulfillment of customer orders, but fulfillment of customer orders is the final process and the that receives the most attention, this because it is the most visible from customers.
ESTABLISHING THE MINIMUM LEVEL OF CUSTOMER SERVICE:
Not having adequate inventory levels affects customer service and poor service has an implicit cost for the possible lost sale.
The level of customer service implies the cost of maintaining adequate inventory, this is in the same way as it is considered in the determination of the Economic Quantity of the Order (EOQ), that is, the annual cost of maintaining the inventory must be considered. as a percentage of inventory value.
On the other hand, not having inventory implies a cost of a sale that was lost, this can be
- The backorder expense that is incurred for subsequent deliveries for customers who accept the backorder. The cost of the loss of income from the sale when the customer changes vendor either once or for the ultimate loss of the customer's account. client.
The cost of lost sales is not simple to determine, therefore, in order to have a procedure that helps us determine the Level of Customer Service, the following is proposed:
- Value on-hand inventory at “cost of sales value” Use the cost of holding inventory in the same way as it is considered in determining EOQ, as a percentage of inventory value Value lost sale as a proportion or as multiple times the cost of sales, this according to the case and / or the particular client. Consider the Line Line Fill Rate as the measure of the level of service to clients that is provided with the available inventory.
In this way we can construct the following graph:
From the graph we can see that:
Cost of Lost Sale: The cost of lost sale is the highest when there is a low value of the level of customer service measured with the Line Fill Rate indicator and as long as the Line Fill Rate is higher, the cost of the lost sale decreases to “zero”, this when the Line Fill Rate is 100%
Cost of Holding Inventory: The cost of holding inventory is low when inventory levels are
Fill Rates are low and increases to their maximum when the Line Fill Rate is 100%
The Total Cost of Customer Service has its minimum value when the Line Fill rate is 100% and at this point that value is equal to the maximum value of the Cost of Maintaining the Inventory, and its maximum value is when the Line Fill Rate is 0 %, and at that point it is equal to the Cost of the Ordered Sale.
The Breakeven Cost what can be considered the minimum acceptable value of Customer Service.
The Cost of the Lost Sale as a proportion or as several times the Cost of Sales and for a given level of customer service (Line Fill Rate) can be determined with the following formula:
The Cost of Maintaining the Inventory for a certain level of customer service (Line Fill Rate) and for a percentage of the inventory value can be calculated with the following formula:
The equilibrium point of costs is that in which the Cost of the Lost Sale and the Cost of Maintaining the Inventory are equal, this point can be considered as the Minimum Acceptable Level of Service:
With the equality of the formulas and doing the algebraic simplifications we have:
From the algebraic simplifications, the suggested formula is obtained to determine the Minimum Level of Customer Service or the Minimum Level of the Line Fill Rate, the final formula is as follows:
From this last formula we can conclude that at the end of the algebraic simplifications, the Minimum Acceptable value of the Customer Service Level is only a function of the percentages of the cost that is considered to be applied, regardless of the cost element that is considered.
Applying the formula to determine the Minimum Level of Customer Service, considering:
- Cost of Sales = $ 100 Cost of Holding Inventory = 20% Cost of Lost Sale = 1 times Cost of Sales Cost of Lost Sale = 1.5 times Cost of Sales Cost of Lost Sale = 2 times Cost of Sales
We obtain the following graph with the results of the Minimum Level of Customer Service:
Applying the formula of the Minimum Level of Customer Service for various levels of the Cost of Lost Sale and for various values to consider to define the Cost of Maintaining the inventory, we have the following matrix of values of the Economic Level of Customer Service:
QUALITY OF INVENTORIES FOR CUSTOMER SERVICE:
The Customer Service Level is a consequence of the Inventory Availability: The inventory level is what helps to achieve the required level in Customer Service. Inventory shortages cannot be eliminated, the operating inventory including your safety inventory helps to reduce the shortages to an acceptable level. To measure the efficiency that a company has in managing its inventories in relation to its sales activity, inventory turnover is the appropriate and normally accepted measurement, however, customer service may be affected due to the lack of inventory, therefore, it is convenient to have an adjustment factor that defines the quality of the inventories and that by weighting the turnover by that factor, a better value of that turnover is obtained and that this value reflects the impact on the level of service to customers,The adjustment factor or Inventory Quality Index is proposed to be the Line Fill Rate, this customer service indicator tells us what proportion of the inventory was useful to fulfill customer orders:
So, with this Inventory Quality Index we can obtain a value of inventory turnover that is weighted by the level of service to customers and specifically with compliance with what the customer ordered, then, the Rotation of the Inventories adjusted to the customer service that is resulting from the operation is obtained as follows:
Weighting the results of inventory turnover will allow us to obtain a turnover value that adjusts with the result of the Line Fill Rate, following up on these adjusted values will allow us to analyze the causes of the damage caused by a low quality inventory and consequently implement the pertinent corrective actions to have a Quality Inventory. We can have Inventory Turnover results that are very plausible, but if we have a low Line Fill Rate, then it means that those low inventories are affecting the Level of Customer Service. Also, the consideration of the Minimum Acceptable Level of Customer Service will be an indicator to consider in order to have a lower limit of the Line Fill Rate.
The Author: Juan Flores Arriaga
- Ingeniero Industrial egresado del Tecnológico de CelayaEspecialista en Cadena de SuministroCertificado por APICS (The Association for Operations Management) en CPIM (Certified in Production and Inventory Management) y CSCP (Certified Supply Chain Professional)
- 39 years of work experience, several of them in Steel Industries, Glass Containers, Food, Instant Photography Film, Sugar and Food Supplements. Author of the book "Measurement of the Effectiveness of the Supply Chain" (Editorial Panorama, year 2004) Previous Articles Published: Analysis of Freight Rates - Én Emphasis Logística Magazine, N ° 135; Nov, 2011. Measurement of the Effectiveness of the Supply Chain - Én Emphasis Logística Magazine, N ° 64; Oct., 2005> Polaroid Measures the Effectiveness of the Supply Chain - Tecnologia Empresarial Magazine, N ° 71; Nov., 2004. Document in search of its publication: Forecasts The Practical and Simple Way. Registered in the National Institute of Copyright (Registration No. 03-2011-091410511700-01).Developer of the Forecasting Model with which the TIMobile company developed the software application.[email protected]
