The unit fill rate (UFR) for an item is the portion of the total number of units requested with inventory available to fill the request. It is distinct from and higher than line fill rate (% of lines shipped complete) and order fill rate (% of orders shipped complete). The target unit fill rate is a decision, not an outcome. It is perhaps the most important inventory planning decision of all.
As discussed previously, the higher the unit fill rate, the lower the lost sales cost. However, the higher the unit fill rate, the greater the inventory required to provide it, and the greater the resulting inventory carrying cost. There are many ways to determine optimal target unit fill rates. One method is to choose the unit fill rate that minimizes expected inventory policy cost. Another method is to choose the unit fill rate that maximizes expected GMROI. Still another method is to choose the unit fill rate that maximizes IVA. What do we do? It depends on the financial, service, and operational goals. The ability to visualize and simulate those relationships as demonstrated in the figure from the RightStock™ Inventory Optimization System is the key and often missing piece in the inventory strategy puzzle.
As explained earlier, fill rate requirements go a long way toward determining overall inventory requirements. Simply put, all things being equal, the higher the fill rate requirement, the higher the inventory level required to support it. The higher inventory levels are the result of additional safety stock inventory.
An example inventory and fill rate analysis from a recent engagement in the health and beauty industry is provided in Figure 2. Note that as fill rate increases (from 50% to 99.95%) the required inventory investment increases accordingly from $4,646,094 to $8,644,548. At the same time, lost sales cost declines from a high of $17,953,234 at a 50% fill rate to a low of $17,953 at a 99.95% fill rate.
The current inventory investment in the example was $8,300,000 and the lost sales cost was $3,949,712. The inventory investment that should have yielded a 99.9% fill rate only yielded an 87% fill rate. The discrepancy turned out to be a major mis-deployment of inventory.