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Service Level Optimization:Identify the Right Service Level Mix to Minimize Working Capital

Service level is a key driver of the amount of working capital (safety stock) in your supply chain. It’s important to set the right amount of safety stock in order to reduce risk, minimize lost sales and increase customer satisfaction. However, it can be challenging to identify the correct service level for each SKU using just rules of thumb, Pareto analysis or ABC classification. While these methods provide a good start, service level optimization is a more precise way to segment service levels across the supply chain.

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Service Level Optimization: Identify the Right Service Level Mix to Minimize Working Capital

How Can You Use Service Level Optimization?

LLamasoft Supply Chain Guru inventory optimization enables you to model supply chain network operations, then run and test inventory policy experiments and optimization scenarios to build dependable, repeatable inventory optimization processes. Using Supply Chain Guru service level optimization, you can now:

  • Optimize service level mix with multiple objectives in mind, including minimize cost, maximize profit or a revenue target
  • Work within a budget for safety stock setting by understanding the maximum service levels that can be achieved within your defined budget

How Does Service Level Optimization Work?

Running safety stock optimization in order to identify optimal safety stock placement is the first step. Once these parameters are defined service level optimization is run. The model considers the cost of safety stock for each product type and target average service level across products as defined by user.
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Let’s Look at an Example Service Level Optimization Model:
A manufacturing facility produces 10 products. Products 1-5 are in one set; products 6-10 are in another set. The overall target service level for the first set of products is 85 percent; the target for the second set is 95 percent. The Supply Chain Guru model considers the value/cost profile associated with each of the products the facility produces, and will recommend policies to minimize cost and maximize profit while meeting defined service level objectives.

In order to do this, the model determines if there is a way to change target service levels while still keeping them within a defined target range. In this example, optimizing service levels resulted in a 12 percent cost reduction when compared with safety stock optimization alone. The result is a reduction in working capital while still maintaining service levels to minimize lost sales.
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Benefits:

  • Helps identify the right service level mix in order to meet organization’s business goals including budget constraints
  • Provides a better way to set service levels for safety stock optimization in addition to the traditional ABC classification
  • Very easy to set up and drive savings off an safety stock optimization model

LLamasoft Is Here to Help

LLamasoft is dedicated to helping businesses build optimized supply chains that help them thrive even in changing market conditions. Partnering with LLamasoft ensures you’ll have more than just software and technical support, but a growing community of supply chain design practitioners, workshops, training and coaching to guide you as you progress. To learn more, email info@llamasoft.com or call 866-598-9831.

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