One of the questions we are asked by nearly every new client is: "What should my fill rate (or service level / in-stock rate / backorder rate) be?" Without diving into item-level sales and supply chain data, this is an impossible question to answer, and we strongly caution against trying to set fill rates against an industry benchmark.
We have clients with profit-maximizing fill rates in the 80% range, and clients with profit-maximizing fill rates well above 99%. This is a number that will vary not just by industry and company, but also among the different items sold within a single warehouse. In this article, we'll talk about the 5 main factors that you should use to determine the right service level for any item in your inventory. In the end, the goal is to reallocate inventory dollars from low-quality items into higher quality, maximizing profit.
1) Profitability
Items that are out of stock will sell less (if at all, depending on a company's backorder policy). Thus, you want to make sure that the items which return the most profit are also in-stock the most often.
2) Holding Cost
Item that are more expensive to keep in inventory should be more conservatively stocked, which will naturally lead to lower fill rates. For example, all else being equal, you want large, bulky items like bubble wrap to have a lower in-stock target than, say, a small pack of washers with the same cost and margin.
3) Sales Volume and Variance
As said above, many companies target different service levels based on sales volume. This is the right approach. Another thing that should be considered is sales variance. For example, assume two items have the same total sales, but one item sells smoothly and consistently while the other has more "chunky" demand. The more consistent item should have a higher target in-stock rate.
4) Lead Time Length and Variance
Items which have long or highly variant leadtimes are harder to stock efficiently. They require more safety stock, and thus, will have a lower profit-maximizing in-stock target.
5) Strategic Importance
Finally, if an item is an own-brand, "front page" flagship, or otherwise strategically important item, you may want to target a relatively high in-stock rate, no matter how it stacks up using the other metrics above.