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The Working Capital System · four modules that build on each other
01Working Capital Designyour inventory strategy02Integration Accelerator™the ERP connection03Order Steering™ordering rules for your purchasing04Managed Operationsongoing operations
ToolWorking capital calculatoryour potential in numbersKnowledgeInsightshands-on knowledge on inventory and purchasingTechnologyEazyStockthe inventory-optimisation softwareTechnologyEazyERPthe middleware to your ERP
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Working Capital Designyour inventory strategyIntegration Accelerator™the ERP connectionOrder Steering™ordering rules for your purchasingManaged Operationsongoing operations
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Why 98, 99 or 100% service level costs you dearly.

The key points

  • The stock for a target service level doesn't grow linearly: every further percentage point costs more than the last.
  • From 90 to 99% target, the safety stock grows by a good 80%; from 99 to 99.9%, by another third.
  • 100% service level isn't an achievable goal: to cover every conceivable deviation you'd have to hold unlimited stock.
  • The right approach is a target per product group instead of a blanket one for the whole warehouse: fast movers high, slow movers deliberately lower.
  • In the simulator in this article you see the trade-off between service level and stock value on a numerical example.

Why does a high service level get disproportionately expensive?

The safety stock scales with the z-value of the normal distribution, and that rises steeply near 100%: for 90% z = 1.28 is enough, for 99% you need 2.33, for 99.9% already 3.09. Every percentage point buys less and less additional service level for more and more capital.

On top of that: the cases you catch with the last percentage points are the rarest and least plannable. No safety stock dimensioned for normal fluctuations helps against a six-week supplier failure.

What does the trade-off look like for you?

Set your baseline (current service level and stock value) and shift the target. The curve shows how stock grows with the target:

Which service level is the right one?

There's no right value for the whole warehouse, but right values per product group. Three questions lead there:

In practice you end up with staggered targets along the classes from the ABC/XYZ analysis: high targets for AX, deliberately lower for CZ.

Don't start with the question "How high should the service level be?", but with "Where do we lose revenue today, and where is dead capital sitting?". The answer is in your consumption history, article by article. That's exactly what a potential analysis computes.

Keep reading

Inventory & Purchasing

ABC/XYZ analysis: a steerable assortment in 4 steps.

Inventory & Purchasing

Never out of stock again: automatic demand forecasts in EazyStock.

Inventory & Purchasing

From slow movers to fast movers: why you shouldn't procure every article the same way.

Inventory & Purchasing

Inventory forecasting: forecasting with fluctuating demand.

Inventory & Purchasing

Inventory optimisation in 3 steps: forecast, optimisation, procurement.

Inventory & Purchasing

Inventory planning: the second step in inventory management.

How much liquidity is tied up in your warehouse?

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