What is Service level?

For a small Shopify store, service level is a decision you make, not something you measure after the fact. A higher service level means you carry more safety stock and tie up more cash, but you stock out less often. A lower service level frees up cash but raises the risk of selling out of popular items.

You use service level to decide how much safety stock to hold for each SKU. Fast sellers with long or unreliable lead times usually deserve a higher service level than slow movers, because the cost of a stockout on a bestseller is higher.

Formula

Example

A candle store picks a 95 percent service level for its best selling scent, which corresponds to a Z-score of 1.65. If demand during the supplier lead time varies with a standard deviation of 20 units, safety stock is 1.65 x 20 = 33 units, rounded up to 33. For a slow moving scent, the owner accepts an 85 percent service level, uses a Z-score of about 1.04, and with a standard deviation of 5 units gets safety stock of 1.04 x 5 = 5.2, rounded up to 6 units.

Common mistakes

• Setting the same service level for every SKU instead of reserving high targets for bestsellers.
• Treating service level as a guarantee rather than a probability, so one bad month feels like a failure.
• Confusing service level with fill rate, which measures actual units or orders fulfilled rather than the target probability of avoiding a stockout.

Service level and SteadyShelf

SteadyShelf uses a service level target per SKU, along with sales forecasts and lead times, to calculate safety stock and recommend order-by dates and quantities.

Work it out for your own products with our free tool: Safety stock calculator.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Safety stock · Z-score in inventory · Fill rate · Reorder point · Stockout

Full inventory glossary

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