Service Level Optimization
Posted by Sridhar Tayur on Thu, Aug 05, 2010 @ 12:20 PM
Closely related to inventory optimization is the selection of the service level target itself (by item, or customer or location). A situation that is commonly encoutered involves meeting a group service level target (across items in a product category) with minimum investment in inventory. In this situation -- since the costs of various items are different, the volumes of their demands are different, the forecast errors are different, their lot-sizes are different, their lead times and the uncertainties in lead times can be different and so on -- it is possible to determine item-specific service level targets that are higher than the median for some items and lower for others, that requires less aggregate inventory investment (when compared to a solution that has service level targets the same).
A variation of the above optimization problem is also common. Instead of specifying a group target, if data on profit margins and likelihood of lost sales (when an item is out of stock) are known, then one can find item level service level targets that maximize the total profit of this product category.
For folks interested in learning more about service level optimization, there is a webinar on August 26th. Please visit www.smartops.com/smartops-events to register.