Page 64 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 3: Customer Accommodation

3.2.1 Basic Service Capability Notes

Three fundamental dimensions of customer service are identified: availability, performance,
and reliability. These attributes are now discussed in greater detail. Numerous research studies
have examined the relative importance of the three service attributes in different business
situations. The general conclusion is that all three aspects of service are important. However, a
given service attribute may be more or less important depending on the specific marketing
situation.

3.2.2 Availability

Availability is the capacity to have inventory when it is desired by a customer. Availability can
be achieved in a variety of ways. The most common practice is to stock inventory in anticipation
of customer orders. The appropriate number, location, and stocking policy of warehouses are
one of the basic issues in logistical system design. Typically an inventory stocking plan is based
on forecasted requirements and may incorporate differential stocking strategies for specific
items as a result of sales popularity, importance of the specific item to the overall product line,
profitability, and the value of the merchandise.

Did u know? Inventory can be classified into two groups: base stock determined by
forecasted requirements and held to support basic availability, and safety stock to cover
demand that exceeds forecasted volumes and to accommodate unexpected operational
variances.
An important aspect of availability is a firm’s safety stock policy. Safety stock exists to
accommodate forecast error and cushion delivery delays during base stock replenishment.
Generally, the greater the desire to protect against out-of-stocks, the larger the safety stock
required. Thus, high safety stock commitment typically means larger average inventory. In
high-variance situations, safety stock can constitute greater than half of a firm’s average inventory.
It should be clear that achieving high levels of consistent inventory availability requires a great
deal more planning than allocating inventory to warehouses based on sales forecasts. In fact, the
key is to achieve high levels of inventory availability for selected or core customers while
holding overall investment in stock and facilities at a minimum. Such exacting performance
requires total integration of all logistical resources and clear goals regarding availability
commitments to specific customers. Exacting programs of inventory availability are not
conceived or managed on “the average.” Therefore, availability is based on the following three
performance measures: stockout frequency, fill rate, and orders shipped complete. These three
measures determine a firm’s ability to meet specific customer inventory requirements.

3.2.3 Stockout Frequency

Stockout frequency is the probability that a stockout will occur. In other words, this measure
indicates if a product is available to ship to customers. A stockout occurs when demand exceeds
product availability. The stockout frequency is a measure of how many times demand for a
specific product exceeds availability. The aggregation of all stockouts across all products is an
indication of how well a firm is positioned to provide basic service commitments. This measure
does not consider the fact that some products may be more critical in terms of availability than
others. However, stockout frequency is a starting point in measuring inventory availability.

LOVELY PROFESSIONAL UNIVERSITY 59