The Importance of the Level of Product Availability in a Supply Chain

The level of product availability is measured using the cycle service level or the fill rate, which are metrics for the amount of customer demand satisfied from available inventory. The level of product availability, also referred to as the customer service level, is one of the primary mea­sures of a supply chain’s responsiveness. A supply chain can use a high level of product avail­ability to improve its responsiveness and attract customers, thus increasing revenue for the supply chain. However, a high level of product availability requires large inventories, which raise supply chain costs. Therefore, a supply chain must achieve a balance between the level of availability and the cost of inventory. The optimal level of product availability is one that maxi­mizes supply chain profits.

In the fourth quarter of 2008, U.S. inventories shot up by $6.2 billion because of the rapid decline in demand that hit retailers and manufacturers. For some manufacturers, the situation was exaggerated because of the excess inventory of raw materials, such as steel and plastics, that they had built up while anticipating price increases. Retailers were also hit hard, with some, such as Saks Fifth Avenue, slashing prices by 70 percent during the holiday season to spur demand. The excess inventories and the drop in demand led to several retailers, such as Steve & Barry’s and Circuit City, declaring bankruptcy during this period. In contrast, Nintendo missed out on an estimated $1.3 billion in sales during the 2007 holiday season because of a failure to meet soar­ing global demand for its Wii video game console. These examples make clear that having too high or too low a level of product availability has a significant impact on supply chain profits.

Whether the optimal level of availability is high or low depends on where a particular com­pany believes it can maximize profits. Nordstrom has focused on providing a high level of prod­uct availability and has used its reputation for responsiveness to become a successful department store chain. However, prices at Nordstrom are higher than those at a discount store, where the level of product availability is lower. Power plants ensure that they (almost) never run out of fuel because a shutdown is extremely expensive, resulting in several days of lost production. Some power plants try to maintain several months of fuel supply to avoid any probability of running out. In contrast, most supermarkets carry only a few days’ supply of product, and out-of-stock situations do occur with some frequency.

The Internet allows a customer to easily shop at an alternative store if the first choice is out of stock. This competitive environment puts pressure on online retailers to increase their level of availability. Simultaneously, significant price competition has lowered prices online. Web retail­ers with excess inventory find it difficult to be profitable. Providing the optimal level of product availability is thus a key to success online.

In the examples described earlier, firms provide different levels of product availability. Every supply chain manager must use factors that influence the optimal level of product avail­ability to target that optimal level and identify managerial levers that increase supply chain sur­plus. Next, we identify factors that affect the optimal level of product availability.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.