Author: Jennifer Hall

June 12th | 3 min read

Distribution Network Strategy – A look at service levels

A network study assesses the performance and reliability of a supply chain network, considering factors such as facility locations, inventory position and transportation routes. It focuses on optimizing the flow of goods, minimizing operational & transportation costs, and enhancing customer satisfaction. One of the major impacts of a network design is a business’s customer service level. While businesses often consider the qualitative impact of service levels, quantifying and including this impact in the financial analysis can change the outcome of a network design, giving the business a competitive edge in the market.

How can we measure and quantify service level impact?

Service level impact refers to the consequences that variations in service levels can have on overall supply chain performance, customer satisfaction, and financial outcomes. It encompasses aspects such as order fulfillment, inventory management, lead times, and transportation reliability. Analyzing different service levels and their effects on supply chain network design is crucial for businesses to make informed decisions. Here’s how and why it is done:

1. Customer Expectations: Different customers have varying expectations when it comes to service levels, such as delivery time, order accuracy, responsiveness, and after-sales support. Understanding these expectations helps businesses understand the service levels required to meet customer demands and preferences.
2. Resource Allocation: Designing a supply chain network involves allocating resources efficiently, such as warehouses, transportation fleet, and inventory. Evaluating service levels allows businesses to determine the appropriate allocation of resources to meet those service level requirements.
3. Cost Optimization: Service levels directly impact costs within the supply chain. Higher service levels often require additional investments not only in processes, technology, and infrastructure but also in maintaining adequate inventory. By examining different service levels, businesses can assess the cost implications and find an optimal balance between service level requirements and associated costs.
4. Trade-offs and Balancing: It’s important to be able to identify trade-offs and balance competing objectives within the supply chain network design. For example, achieving higher service levels may require additional distribution centers or inventory buffers, but this might increase costs. Analyzing the constraints helps identify the most effective trade-offs to optimize the design.

Quantifying Service Level Impact:

Quantifying service level impacts enables organizations to optimize their supply chain operations and generate positive financial outcomes. By understanding the relationship between service levels and sales, businesses can make informed decisions about resource allocation and supply chain design.

Examining the Relationship Between Service Levels and Sales/Margin

When service levels are improved or decreased, this, evidently, can impact sales. Offering shorter lead times gives companies an additional differentiating factor than simply price point. This relationship provides a starting point for understanding how changes in service levels can affect financial performance. An effective evaluation process considers various aspects such as product perishability, competition dynamics (monopoly vs. non-monopoly), sales channel (brick-and-mortar vs. e-commerce) and customer impulsiveness (whether sales are lost or retained).

Considering Competition and Use Cases

Competition is a key factor when quantifying service level impacts. For example, in a monopoly scenario, where there is limited competition, service levels will not highly impact sales potential compared to a business operating in a competition-driven environment. Where competition is fierce, businesses must strive to provide superior service levels to gain a competitive edge and differentiate themselves from rivals. These factors help determine the appropriate service level strategies for optimizing business outcomes in a competitive market.

Collaboration for Establishing Appropriate Service Level Targets

Collaboration among departments, such as sales, operations, marketing, and merchandising, plays a pivotal role in determining appropriate service level targets. Each department brings its unique expertise and insights to the table. By aggregating input and perspectives, a consensus can be reached regarding the ideal service level targets. This collaboration establishes a benchmark or “guard rail” for further evaluation and decision-making, ensuring that the impact of service levels is considered in the overall evaluation process.

Incorporating Service Level Impact into the Quantitative Evaluation Process

Quantifying the impact of service level changes on sales is an integral part of the network evaluation process. It is crucial to measure and analyze the financial performance implications resulting from different service level adjustments. By doing so, organizations gain a comprehensive understanding of the potential outcomes and can make data-driven decisions. This analysis aids in shaping supply chain design, resource allocation strategies, and improvement initiatives. To quantify service level impact, businesses can utilize various methods and metrics, including:

1. Sales Data Analysis: Evaluating sales data allows businesses to correlate service levels with the purchasing behavior of customers. Higher service levels often result in increased sales, indicating a positive impact on revenue generation.
2. Margin Analysis: Analyzing profit margins helps determine how service levels impact overall profitability. Higher service levels can lead to improved customer loyalty, repeat business, and increased margins through premium pricing strategies.
3. Customer Satisfaction Ratings: Tracking customer feedback and satisfaction ratings provides valuable insights into the quality of service provided by the supply chain. Positive ratings reflect higher service levels and can lead to increased customer loyalty and retention.

When quantifying the financial performance of a network, service level can be the differentiator between a winning and losing scenario. When it comes to evaluating the impact on sales, what may look like a lean and economical network on-paper can actually be outperformed by one with more distribution points strategically located closer to the customer. Ignoring its financial impact can leave gaps in understanding the effectiveness of the network design.

Final Thoughts

Customer service level expectations are increasing. With the constant flux in customer demands, your supply chain network must be able to adapt quickly to meet new needs without damaging your bottom line or profitability. Understanding how to properly measure and quantify service levels is an important step in supply chain network design, and omitting it from the evaluation will leave you with a blind spot. Partner with LIDD to ensure you not only meet but exceed these rising expectations. We’re here to help you navigate the complexities and drive your business forward.

LIDD Distribution Network Strategy

As supply chain operations grow in scale and intricacy, every element of the supply chain now merits skillful engineering and/or investment. Distribution network strategy is critical to making sure you are optimizing every link in your supply chain.

For more information on the topic and distribution network strategy, reach out to Jennifer Hall directly [email protected] or click the link below.

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