A recent study found that retailers lose an average of 4% in revenue due to stockouts. This is a major hit for any business, big or small. When customers can’t find what they want, they go elsewhere.
This directly impacts a company’s service level — its ability to consistently meet customer demand. A key factor in achieving that level is the fill rate, which measures the total percentage of customer orders fulfilled from available stock. Poor fill rates lead to lost sales, frustrated customers, and a damaged brand reputation.
You’ve probably heard “service level” and “fill rate” used interchangeably, but they’re distinct concepts with a close relationship. In this guide, we’ll tell you all about service level vs. fill rate.
What is Service Level?
Service level can make or break customer satisfaction. It defines the level of service a company promises to its customers. Think of it as your ability to meet customer demand based on the season or stock availability.
This isn’t just about delivering products on time. Service level measures a wide range of factors, including order accuracy, response times to inquiries, and the overall customer experience. High service levels equal happy customers, repeat business, and a strong brand reputation.
Here are some service level KPIs:
- Order Fill Rate: The percentage of customer orders fulfilled completely and on time.
- Order Accuracy Rate: The percentage of orders shipped without errors, such as incorrect items, quantities, or delivery addresses. Be warned: You don’t get too many chances. On average, consumers will tolerate three mistakes from a brand before losing trust.
- On-Time Delivery Rate: The percentage of orders delivered within the promised timeframe.
- Order Cycle Time: The total time to process and fulfill a customer order. Faster order cycles equal higher customer satisfaction and a lower risk of lost sales.
- Customer Complaint Resolution Time: The average time taken to resolve customer complaints. Research says 52% of customers expect a response within one hour.
- Customer Satisfaction Score: Surveys and feedback mechanisms measure customer satisfaction with different aspects of the service experience.
Understanding Fill Rate
Fill rate measures the amount of customer demand fulfilled from available stock. It tells you how often you can deliver what your customers order. A high fill rate means you have the right products in stock when customers need them.
Here’s why it’s important: Stockouts have serious consequences. Lost sales are the most obvious, but they also damage customer relationships, erode brand loyalty, and increase operational costs. That’s mainly due to expedited shipping, backorders, and potential returns.
Fill rate also gives you insights into inventory levels. A consistently low fill rate might indicate insufficient stock, while a very high fill rate could signal excess inventory and potential holding costs.
Order Fill Rate
The order fill rate measures the percentage of customer orders fulfilled completely and on time from available stock. It is the most common and widely used fill rate metric, and it tells you exactly how well a company meets immediate customer demand.
Case Fill Rate
Case fill rate measures the percentage of customer orders fulfilled in full cases. If you sell products in cases or pallets, you must measure this metric. Taking a more proactive approach will keep your warehouse operations efficient, leading to higher case-picking accuracy and order consolidation.
Vendor Fill Rate
Vendor fill rate measures the percentage of complete and accurate orders received from suppliers. This metric can be used to assess supplier performance and identify potential supply chain disruptions. A low vendor fill rate can lead to stockouts, production delays, and higher costs.
Fill Rate vs. Service Level Formulas and Calculations
You can calculate the fill rate vs. service level formula with a few simple steps.
Measuring Service Level
The formula for calculating the service level is:
Service level: (Number of orders fulfilled on first attempt/Total customer demand) x 100
For instance, if your company had a total demand of 1,000 units and fulfilled 900 units on the first attempt, your service level would be:
Service level: (900/1,000) x 100
The service level would be 90%.
Measuring Fill Rate
The formula for calculating the fill rate is:
Fill rate: (Total orders shipped/Total orders placed) x 100
If your business received 500 orders and shipped 450, the fill rate would be:
Fill rate: (450/500) x 100
The fill rate would be 90%.
Relationship Between Service Level and Fill Rate
Service level and fill rate are inherently intertwined. Fill rate directly impacts your ability to achieve the in-demand satisfaction rate and service levels since it helps you anticipate and meet customer expectations.
How Fill Rate Impacts Service Level
The fill rate is the main driver of service level. When it’s high, you can fulfill most orders from available stock. This leads to fewer backorders and better on-time delivery. Plus, customers are more satisfied when they receive their orders as expected.
Conversely, low fill rates can lead to:
- Order delays and frustrated customers
- Missed delivery promises
- Damaged customer trust and reputation
- Long-time customers turning to competitors
But that’s not the only way the two metrics are connected — demand variability plays a huge role, too.
For instance, during periods of erratic demand, your business may achieve a high service level, even fulfilling 98% of orders. At the same time, your fill rate will drop, often only fulfilling 50% of total demand due to insufficient inventory. With unpredictable demand levels, you won’t know how much you need to stock days or weeks in advance.
However, this is a problem easily solved with demand forecasting. Not only does it predict usual demand levels, but it also considers seasonal fluctuations and current events to predict how much you should stock. This way, your fill rate and service level can both remain optimal.
Measuring the Interplay Between the Two Metrics
While fill rate is an important component of service level, it’s not the only factor. To accurately measure the interplay between service level vs. fill rate in the supply chain, you’ll need to consider factors like:
- Order fulfillment cycle time
- Order accuracy
- Customer response times
- Customer satisfaction surveys
It’s only when you look at these factors in conjunction with fill rate that you’ll learn more about your service level and inventory performance. Still, don’t forget that the ideal balance between service level and fill rate varies based on your industry. What works for B2C won’t work for B2B.
As a retailer, you should aim for a fill rate of around 95—98% since demand is typically high. Meanwhile, eCommerce businesses often target a fill rate of 90—95% and a service level of 95% or higher. If you’re B2B, you can get away with a fill rate under 90%, too.
Factors Influencing Fill Rate and Service Level
Certain factors affect your ability to maintain high fill rates and deliver top-notch service levels. Once you understand them, your inventory and supply chain management strategy will improve.
Demand Forecasting and Its Role
Accurate demand forecasting is the foundation of any successful inventory management strategy. Once you predict future demand, you can optimize safety stock levels, lowering the risk of both stockouts and excess inventory.
We recommend using sophisticated forecasting methods, such as statistical modeling and machine learning algorithms. These will help you anticipate demand fluctuations, seasonal trends, and unforeseen events. Using AI for this task can help you cut inventory carrying costs by 20%, says Harvard Business Review.
Supplier Reliability and Performance
If you want to keep your fill rates consistent, you need to work with reliable suppliers. Consistent on-time delivery, high product quality, and the ability to meet fluctuating demand — these are all characteristics of a supplier you can count on. Around 72% of SMBs deal with unpredictable delivery times from their supplier, and it costs them a pretty penny.
Logistical Challenges and Solutions
You may be all too familiar with transportation delays, inaccurate order picking, and inefficient warehouse operations. These supply chain problems aren’t just a nuisance — they also negatively impact fill rates and service levels.
Investing in robust transportation networks and warehouse management systems (WMS) can go a long way. We also recommend investigating alternative transportation, such as expedited shipping or regional warehouses, for faster delivery times.
Strategies to Improve Fill Rate and Service Level
Improving fill rate and service level requires a multi-faceted approach. Here are some strategies.
Enhancing Inventory Management Practices
Effective inventory management is the key to better fill rates. This includes implementing robust inventory control systems, such as ABC analysis and economic order quantity (EOQ) models. These can help you optimize stock levels, avoid stockouts, and reduce holding costs.
Optimizing Supplier Relationships
Strong supplier relationships equal a reliable supply chain. You must work alongside suppliers to improve forecast accuracy and make order fulfillment processes as smooth as possible. You should also have early warning systems for potential disruptions in demand.
Technology and Automation Solutions
You can’t improve your service level and fill rate without investing in technology. Look into WMS, customer relationship management (CRM) systems, and transportation management systems (TMS). These tools will help you automate supply chain tasks, improve efficiency, and provide valuable data insights.
Optimize Fill Rate and Service Levels With GAINS
If you’re looking for customer loyalty and business growth, you won’t get far without exceptional service. You can achieve this by prioritizing service level and fill rate. Now that you’ve read our fill rate vs. service level guide, you can consistently give your customers what they need when they need it.
Remember, accurate demand forecasting is the foundation for achieving these metrics. Gain Systems offers powerful demand planning and forecasting solutions to help you predict future needs with precision. Contact us today to learn more!
