How to Calculate Service Level for Retailers

calculate service level for retailers
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Retail business is based on the set of essential principles designed to ensure the business’s financial health and sustainability. Relevant predictions, calculations, and accurate forecasts for future sales are the other essential elements used by retailers to reach strategic goals.

Retail business is also dependent on effective supply chain management practices. However, in the age of personalized shopping experience, the level of customer needs’ satisfaction remains the crucial factor underlying the retailer’s success.

Sustainable supply chain management relies on the use of smart data which is crucial for sales forecasts. The latter, in turn, help retailers to meet customers’ expectations and reach business goals.

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One of the biggest challenges for retailers is to find the right blend of stock level to satisfy as many customers as possible without losing sales.

In this regard, several crucial KPIs are used and the service level for retailers is one of the most important ones. The service level is used across many industries, yet in retail and inventory management it remains one of the most impactful considerations while planning.

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What is the Service Level?

Service level is a measurement used by retailers to make sure that the particular level of service is delivered to their customers.

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Customers’ shopping experiences are the game-changing aspects in retail along with market demands, supply and stock maintenance. And the question arises on how to keep customers satisfied and delighted with your retailing. Well, the answer lies in the service level calculations and their right use.

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In simple words, service level specifies the number of customers left pleased with the retailing services. As we all know, converting your every customer into a satisfied customer is a challenging task. Therefore, we need to calculate the ration and amount of satisfied ones out of dissatisfied customers. In this way, the service level could be determined, tracked, and improved.

How to Calculate Service Level:

The formula used for calculating service level is:

Service level = the number of quantities delivered in time / the total quantity of demand

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The most common way to calculate the service level is to determine the correlation between the demand of customers and qualities delivered to them by retailers.

However, the calculation can be varied because it depends upon the factors like market segment industry type and retail business type as well.

However, for stocks and inventory, the formula will change a little bit like the quantity delivered/ the quantity in demand.  Also for the frequency of stock-outs, the formula would involve the number of orders delivered/ the total number of orders.

Wherever you need to calculate service level just put the successful deliveries on top and divide them with total opportunities to please the customers.

What does the Service Level show?

Most of the time, the service level is the mention of no-hitting the probability of each opportunity even when it was possible. The formula shows the total number of successful deliveries needed to hit a particular service level.

In other words, the category shows the number of successes a retailer needs to achieve.

It also marks how much you have got out of the market demand. Or how much value you as a retailer provided to your customers. More service level is, the larger the number of satisfied customers you have.

Also, the service level can be used for future forecasting as a benchmark. Because the denominator is the total number of demand or total of everything your customer needs. You just have to enhance the performance of the nominator by providing the requested services.

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Paschal Okafor is NaijaTechGuide Team Lead. The article How to Calculate Service Level for Retailers was written by Ariana Smith. The article was last modified: February 19th, 2020

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