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Criteria for Selecting High Service Factor Items

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Inventory management is a key element in any sophisticated distribution software or manufacturing software solution. In Enterprise 21, inventory levels can be maintained on a product-by-product basis using a variety of inventory control methodologies. These include a simple reorder point with minimum and maximum values, safety stock level (measured in days supply on hand), and service factor, with each methodology accounting for seasonal fluctuations in demand for a given product. Service factor, which is a number between 1 and 100, allows the organization to select a desired line item fill rate for a given product. An item with a service factor of 50, for example, means that for every 100 orders for that item, 50 orders will be able to be serviced directly out of available inventory. An item with a service factor of 95, however, means that for every 100 orders for that item, 95 orders will be able to be serviced directly out of available inventory. So, with this basic understanding of service factor, what criteria should the organization use in determining the products that should be set to have high service factors?

There are two key criteria for selecting products to have high service factors. First, items with a high order volume or high order frequency should be set to a high service factor. Items with a high order volume and high order frequency account for a significant portion of the organization’s business and revenue. Having the ability to fulfill orders for these items routinely out of available inventory will not only increase gross revenues, it will also lead to increased levels of customer service and satisfaction.

The second criteria for selecting items to have high service factors is high profit margin. Setting items that have a high profit margin to have a high service factor will result in increased bottom-line profits for the organization. Even if an item has a relatively low order volume or frequency, being able to fulfill orders for items with a high profit margin directly out of available inventory will decrease the likelihood of the customer shopping for the product elsewhere and increase the likelihood of repeat business from that customer.

For items with high order volume and frequency or high profit margin, using a service factor inventory management methodology can provide a powerful tool that can be leveraged to increase bottom line profits, improve customer service and satisfaction, and improve the likelihood of repeat business from a given customer.

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