Development of service level

The extent of range and delivery speed are not the only ways in the development of service level. Figure 1 illustrates seven different effects of company’s functions on storage, customer service and costs. White arrows in the bottom line of the table show the direction of desired target state, such as companies seek to lower inventories, improve customer service and lower costs.

Improving customer service.

When company’s supply chain goal is good customer service (1), it have to increase its inventory levels, which in turn increases storage costs. The effects are marked with shaded arrows, which illustrates that they are inconsistent with the desired target state.

When trying to achieve low transport costs (2) stocks should be added, so that transport can be handled effectively without post deliveries. Another way is to lower customer service level. However, both effects are the opposite of what is desired

When trying to achieve low storage costs (3) warehouses and customer service levels should be lowered. The latter of these is a non- desired goal state. The same thing in other words, that is, when trying to achieve low stock levels, (4) usually one must bargain on customer service, by which costs are decreased.

When promising fast transport to clients (5) the effects are the same as in goal one. Transport acceleration improves customer service (desired) but often requires increase in inventories and higher transport and storage costs (unwanted).

By increasing inventory level and lowering customer service one can achieve lower labor costs (6), but effects are the opposite to desired target state.

The result are compromises

Many of company’s function goals cause many unwanted effects in accordance with previous figure. Therefore, decision-makers have to make compromises. For example, supply chain aiming to improve customer-orientation must accept a certain degree of growth in storage, transport and personnel costs.

In conclusion, company and the entire supply network must decide whether its customer promise is best service, cost leadership or delivery of tailored services. Only after this the most effective ways will be found to improve service. Sure, improving customer service is possible to a limited extent as long as costs are not increasing too much. Transport has a crucial role in improving both customer service and cost- effectiveness, therefore transport is dealt in a separate section.