Examples of service level: The term "service level" is used in supply-chain management and in inventory management to measure the performance of inventory replenishment policies.
As these costs are difficult to quantify in practice, the logistical performance of an inventory node in a supply network is measured with the help of technical performance measures.
The target values of these measures are set by the decision maker.
If the controlling of the performance of an inventory node is neglected, the decision maker will not be able to optimize the processes within a supply chain.
The α service level is an event-oriented performance criterion.
It measures the probability that all customer orders arriving within a given time interval will be completely delivered from stock on hand, i.e. without delay.
Two versions are discussed in the literature differing with respect to the time interval within which the customers arrive.
With reference to a demand period, α denotes the probability that an arbitrarily arriving customer order will be completely served from stock on hand, i.e. without an inventory-related waiting time (period
In order to determine the safety stock that guarantees a target
service level, the stationary probability distribution of the inventory on hand must be known.
This second definition, which is often used in operations management textbooks, is based on the idea of not running out of stock during the time between re-ordering and order arrival (the leadtime).
That is, the probability of demand during that leadtime being less than or equal to the amount of stock you had left when you ordered.
It assumes your reorder point is positive, that orders are in unit increments and inventory is monitored continuously so you cannot stock out prior to reordering.
The β service level is a quantity-oriented performance measure describing the proportion of total demand within a reference period which is delivered without delay from stock on hand:
This is equal to the probability that an arbitrary demand unit is delivered without delay.
This approach usually involves calculating a loss integral, whose values are tabulated for the normal distribution.
service level does not only reflect the stockout event but also the amount backordered, it is widely used in industrial practice.
The γ service level, a time- and quantity-related performance criterion, serves to reflect not only the amount of backorders but also the waiting times of the demands backordered.
The γ service level is rarely used in industrial practice.
The term "Service Level Agreement" (SLA) is frequently used for all aspects of a service level, but in more precise use one may distinguish:[4] SLIs form the basis of SLOs, which in turn form the basis of SLAs.
If an SLO is missed, customers will typically receive a credit or rebate, as stipulated by the SLA.
A missed SLO is sometimes casually referred to as an SLA violation, but this is actually within the scope of the SLA; if an SLA itself is violated (e.g., by not giving a rebate for a missed SLO), it is instead likely to result in a court case for breach of contract.