Estimating service level impacts from changes in cycle count, buffer stock, or corrective action

An inventory stock record is in error when the stock record is not in agreement with the physical stock. Discrepancies are introduced during the stocking point’s normal operations due to keypunch errors, incorrect unit of issue, returned goods, etc. Physical inventories (inventory counts) attempt to reconcile the balances. The primary impact of these errors is that the system may fail to reorder when it should, resulting in customer service levels (the likelihood of stockouts not occurring) lower than the expected. This, of course, compromises the manager’s ability to provide an adequate level of material support. Faced with this problem and a specified stocking policy, the manager has three possible mechanisms for improving service levels: increase the frequency of inventory counts; increase his buffer or safety stocks; or initiate efforts to pinpoint the sources of the errors and take appropriate corrective actions. The thrust of this article is to enable the manager in a ‘back of the envelope’ fashion, to estimate the gains in service level that can be expected from contemplated changes in any one or a combination of the above mechanisms. The estimates do not require any distributional assumption of the underlying error process and are conservative. Armed with these estimates and the relative costs of each, the manager has powerful decisions aids for selecting a cost-effective choice of action.