Service level in inventory management

The customer service level in inventory management is understood as the degree of readiness to meet demand from stock. Determining and ensuring it is particularly important in the context of independent demand (cf. “A brief review of classical inventory theory”). It is common practice to define the service level in percentage terms. One often hears, for example: “we serve customers at a 99% level” or “we meet 100% of the demand for product X, but for product Y, a 95% level is sufficient.” Setting aside for a moment the realism of assuming a 100% service level, we are left with the question: what does the decision-maker defining such a service level understand by a given number?

Properly defining the service level is also important when using IT systems that support inventory management. In many systems, as part of the description of each item or material, alongside logistical data (physical form, type of packaging, characteristics of collective packaging and palletized load units), cost data (price, ordering cost, cost of holding a unit in stock), and lead time data (order fulfillment time), it is necessary to enter the required service level. Often, the system “suggests” a standard value here (e.g., 95%), and in many cases, this suggestion is accepted without a deeper analysis of the consequences of its adoption. This article aims to organize the concepts related to the customer service level in inventory management and present the relationships that allow for the proper determination of its value.