The 2020 Mid-Year Economic Update_long

Operations Q&A: Is Perfection Attainable in Distribution?

Service level is important, but don't get hung up on the number.

Question: When is 100 percent not the perfect solution?

Answer: I was recently at a meeting in which a colleague asserted that distribution companies should strive for 100 percent service levels. My eyes popped open at this.

You are all familiar with service levels, right? How many items are shipped versus ordered. Or to make it more challenging, how many lines on an order are shipped complete. My personal favorite is the first. Imagine having 50 items ordered, “only” shipping 49, and having that recorded as a big ZERO percent because not all 50 were shipped, versus a 98 percent service level because 49 out of the 50 ordered were shipped.

If I’m flying, I certainly want the airplane to work 100 percent of the time. If I’m having open heart surgery, I not only want but need perfection. But is perfection attainable in a distribution environment?

Bottom Line: It is almost impossible … unless your company wishes to throw a whole lot of resources at the challenge. Imagine how many dollars of inventory must be purchased to stock the shelves so that there is never a backorder. It is easier to accomplish with your “A” items because, by definition, those are the items that sell most frequently. But how much should you spend to ensure immediate delivery of a “D” item that is rarely ordered?

Achieving a service level percentage approximating perfection can be done only if sophisticated forecasting software is in use. My suspicion is that most of your companies do not operate with that kind of software and that employment of such software is financially and resourcefully beyond your company’s capabilities. So what to do?

As the saying goes, “don’t throw out the baby with the bath water.” Shooting for a 97-98 percent service level rate is, in many circles, a very acceptable target. Maybe your industry tolerates something less, like 95 percent.

Achieving your goal, whatever that may be, includes but is not limited to:

  • Knowledge of historical sales volumes.
  • Forecast of future sales.
  • Establishing velocity codes for your products.
  • Knowing vendor requirements – order levels, lead times, freight policies, etc.
  • Understanding company cash flow availability.
  • Having the proper software to spit out the correct quantities.

With the right ingredients and a proper recipe you can reach your service level goals.

Lee Schwartz, former CEO and president of distribution and manufacturing companies, is principal of the Schwartz Profitability Group (SPG) that, for almost 13 years, has uncorked the operational bottlenecks of distribution and manufacturing companies, boosting their bottom line results. His consulting and operational turnaround work helps clients find solutions related to process improvement, supply chain management, inventory control, workflow design, and operational performance.

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