ASSESSING SERVICE LEVEL TARGETS IN PRODUCTION AND INVENTORY PLANNING

In production and stock planning, the relationship between customer se rvice, defined as the ability to meet demand for finished goods from i n-stock inventory, and expected profits or expected costs can be repre sented by a simple reliability curve. The shape of this curve depends upon the parameters of the demand process, specifically the expected l evel of demand, standard deviation and correlation structure, as well as upon the capacities and initial state of the production and invento ry system. A model is presented which explicitly determines this trade -off curve for a firm. The model is intended both as an operational mo del to aid managers in setting revenue and service targets which are c ompatible with the capacities and resources of the firm, and as a tool for exploring relationships between the parameters of the demand proc ess and the constraints of the physical production and inventory syste m. The results illustrate that the level of risk depends strongly on t he variability of the demand process, the cost structure, the capaciti es and initial state of the system and, to a lesser extent, the correl ation in demand between succeeding periods. Results suggest that estab lishing service level targets consistent with the firm's strategic ori entation must be done in consideration of both the characteristics of the demand process and the capacities of the production and inventory system. The model provides a tool for estimating the premium above uni t cost which must be paid to provide a designated service level.