With SIMMS Inventory Management software, as with other programs, competent inventory management incorporates a simple philosophy: having enough stock while concurrently not having an excess of it.
Inventory exists so that we never suffer a ‘stock out’. That is its sole purpose. Holding costs come to bear directly on the amount of stock we have. When do we reorder to keep from having a stock out? Suppliers’ lead times, combined with the uncertainty in the demand for the stock, are the primary factors in making that decision toward a guarantee that a stock out does not occur.
The ‘Service Level’ of a company would be at 100% for a complete guarantee that stock outs never occur. However, many companies do not have the means nor do they feel the need for an 100% guarantee. Remember, if such a Service Level has already been proven to exist from the supplier of the stock, then the need is very low for the warehouse to continue to bulge with extra stock (so-called Safety Stock) that was purchased only for the purpose of ‘your’ guarantee against a stock out. Your supplier’s 100% rating is their concern, and thus many firms choose to only apply an 80% Service Level in-house. Service Levels can, by use of formula, be reduced to a ‘z-value’, which is a ratio, and as such is easier to apply to the calculation of reorder points.