How Should a Company Set Service Levels? Perception vs. Reality

We all understand that accurate forecasts are a necessary ingredient for inventory management; however, the problem remains that if filtered through poor procedures for setting inventory targets, accurate forecasts by no means ensure desired inventory performance. In this feature section, Foresight showcases two articles on the key role of service-level targeting in managing inventories. The service level for an inventory item is the probability that no shortages occur between the time you order more stock of the item and when it arrives on the shelf. In the second article, Shaun Snapp argues that although the selection of service-level targets has immense implications for company inventory costs, current approaches that firms use to set such targets leave much to be desired. Too often, firms rely on heuristics such as Service to our customers is a differentiator from our competitors, so it must be set high. The companies also suffer from cross-functional divergence in what the targets should be. Multi-Echelon Inventory Optimization (MEIO) software is certainly available to help model the key relationships needed; but, Shaun reports, there are serious challenges in implementation that some companies find difficult to overcome. He recommends development of a "lighter-weight" application and describes its key features. Copyright International Institute of Forecasters, 2018