Setting customer service levels: An overall cost-approach

Customer service level decisions are usually based on qualitative market information and internal costs only. This paper suggests an approach of using quantified costs information of both customer and supplier in setting service levels. After a brief introduction on how customer service can be defined its typical cost-structure is described. Due to the characteristics of this cost-structure the use of unquantified and ambiguous market information in setting service levels can easily lead to under-servicing or over-servicing. The overall cost-approach in which both supplier and customer costs are considered better supports service level decisions. This approach must be used in combination with other service level considerations. Some conditions for using the approach are identified. The applicability of the approach is described in relation to typical customer-supplier relationships.