Service Level is a very important performance indicator. According to Wikipedia (http://en.wikipedia.org/wiki/Service_level), when it is reffered as a quantity-oriented Service Level, it measures the proportion of total demand, within a reference period, which is delivered without delay, from stock on hand and it is expressed as a percentage.
In most cases, service level is predetermined and it is used as a basic parameter for calculating the Safety Stock. In real practise, it is a MUST to assure that the goal is achieved and maintained, by measuring it at a regular basis.
There are not many info you can find about it in the internet. You might get some fancy algorithms that won't help you much in your daily work. Most of the info that I have traced refer to the S.L. as the Expected BackOrders over the Expected Demand. That is very true but...you don't actually measure what is happening but you rather express your enthousiasm on how well you are going to work. It is a predetermind goal and not an achievement.
After giving it some thought I realised that it is better to measure how things have gone in the real life. The key to do that is to find the actual backlog for a specific period. All the ERP's I've seeing do not offer such a report and the ERP that I use does not either. So how to measure it?
The key is to use your SQL knowledge and some VBA to do the trick in Excel. What I've done was to track every Order that the Sales Department had placed and then store in a spreadsheet the date that the order was issued and the initial delivery date that the order was given. These two fields are found in every ERP, large or small, and it is just a matter of few SQL querries to retrieve it. The next step was to perform an other querry to retrieve the Invoice that corresponded to that Order. Again all ERPs offer this kind of binding between Sales Orders and Invoices. And bingo! You can get the Supposed Delivery Date and the Actual Delivery Date. Subtract the two dates and what you get, is a backlog in days for that given period.
From now on you have several options. The first and easiest one, is to add the all the orders that were backloged (I prefer to use Units instead of Money), disregarding the number of the days and divide it with your total sales for the same period. Subract it from 1 and you'll get a robust percentage of your actual Service Level. So, say you had
$5.000 backloged and you total Sales were $100.000. Thus 1- ($5k / $100k) =95%.
While this is quite an orthodox approach, it is not enough.
What I prefer to do is to find the average number of days that the sales orders where backloged for every month and report it as a plain number. This is a very important indicator because it also shows how many days your customers waited more, than what you had commited, for receiving their goods. Since every customer complains even for a single day of delay, it is important to know if you had a Service Level of 95% over a given month and a backlog of 5 days than a 95% Service Level and 15 days of Backlog. The difference is huge!
The third thing and most tricky one, is to calculate the weighted average of your backlog in days. Since many different orders might be in backlog, it is important to weigh your numbers based on the order's value. So 10 orders worthing $10 each should weigh less than a $10k order. To get this, just multiply every order's value with the number of days the order had been backloged and sum the results. Then divide this number with the total value of orders in backlog. The result is expressed in days and it is the TRUEST approach of your real backlog.
If you have reached this point than you can create many other interesting reports such as Service Level per Customer. You 'll find it very usefull when you have to decide (if there is no other alternative) which order to postpone.
P.A.
