Question

1- What is meant by the term service level?

2- Under what circustances would the amount of safety stock held be: a-) Large? b-) Small? c-) Zero?

3-How would you respond to the criticism that EOQ models tend to provide misleading results because values of D, S, and H are, at best educated guesses?

4-Why might it be inappropriate to use inventory turnover ratios to compare inventory performance of companies that are in different industries?

Answer 1

By the term "service level" we understand that it is something for measuring the performance of an organization or a system. Every organization sets its goals with an intention to achieve them and service level gives the percentage upto which the goal has been achieved. This ultimately keeps a check on the performance of the company.

For example a company gets an order of delivering 10 packets of biscuits. The firm had delivered nine packets and one whole is left to be delivered them service level is said to be zero. If the last packet has been transfered to packaging and only 30% work is left, then the service level would be 30 % in that case.

This is used in supply chain management field and for the purpose of inventory management also. The main purpose is to get the performance of the policies of inventory replenishment.

In other words we can say that as according to supply chain management, it is the probability or expected probability that there will not be any stock out when next replenishment cycle occurs. And hence this can insure regular supply and no stoppage in sales. The time taken to complete one cycle is the lead time.

If the service level is full or hundred percent that means customers demands are being managed by the firm.

Therefore it is very important for a firm to manage its service level. This ultimately leads to growth in the organization and results in non stop sales with more and more profit. If service level goes down its a reminder for the organization to improve its service.

So we saw hoe this service level determines the performance of a firm.