Supplier service level and out-of-stock rate: why the two do not tell the same story?

Two indicators, two places in the chain

The supplier service level (or logistics service level) is calculated on deliveries: quantities delivered on time and compliant, divided by quantities ordered. A level of 98% means that 2% of the ordered quantities did not arrive, or not on the planned date. It measures upstream performance: supplier, warehouse, transport.

The on-shelf out-of-stock rate is counted on the shelf: references absent from the shelf, divided by references that should be there. It measures what the shopper sees. The calculation is detailed in on-shelf out-of-stock rate: how to calculate it.

Between the two lies everything that happens in the store: local ordering, receiving, the back room, replenishment, facing, book stock. According to Corsten and Gruen, that is where 72% of out-of-stocks are born. In the UK, ECR UK’s industry measure found on-shelf availability of about 92% on fast sellers even where upstream service is high.

Why a good service level guarantees nothing

A common example: a banner posts a warehouse service level of 98% and an on-shelf out-of-stock rate of 7 to 8%. Both figures are correct. The delivery arrives, but:

• the local order was too tight compared with real sales (forecast);
• the pallet waits in the back room while the shelf is empty (replenishment);
• the facing is too short to last until the next pass (capacity);
• the book stock says the product is there, so nothing is reordered (phantom stock).

None of these causes shows in the service level. A manager who tracks only the service level believes their out-of-stocks come from the supplier, and does not act on three quarters of the problem.

What each indicator lets you fix

Indicator	Where it is measured	What it reveals	What you fix
Supplier service level	at receiving	delays, shortages, delivery errors	order lead times, backup suppliers, disputes
Stock-out rate	in the system	references at zero book stock	order parameters, forecasting
On-shelf out-of-stock rate	on the shelf	references absent for the shopper	replenishment, facing, back room, phantom stock

The on-shelf out-of-stock rate is the only one of the three that includes the others: a delivery failure ends up as an empty shelf, and so does a replenishment failure. So it is the one to track first, and you trace the cause with the other two.

How to read the gaps

• Low service level, high on-shelf out-of-stock: the problem is upstream. Act on orders (lead time, safety quantity) and on the supplier.
• High service level, high on-shelf out-of-stock: the problem is in the store. Act on replenishment, facing and book stock, as described in how to reduce out-of-stocks on the shelf.
• High stock-out rate, on-shelf rate close to it: the store orders badly or too late; automatic ordering parameters need reviewing (automatic ordering and out-of-stocks).
• Low stock-out rate, high on-shelf rate: the product is in the store but not on the shelf: back room, replenishment or phantom stock.

An example

Grocery aisle, 800 references. Warehouse service level for the month: 97.5%. Stock-out rate (system): 1.5%. On-shelf out-of-stock rate counted at 5 pm: 7%. Reading: 1.5% of references are really missing from the store, but 7% are missing from the shelf. The 5.5-point gap is products present in the back room or in book stock, invisible to the system: that is where the gain is, and it does not depend on the supplier.

What shopper reporting changes

ShelfAlert measures the indicator that matters, the out-of-stock seen by the shopper, reference by reference and hour by hour, without a counting walk. Compared with book stock, each report says at once whether the cause is upstream or in the store. 14-day trial, no payment card: see the plan for store managers.

Sources

• Corsten, Gruen, “On Shelf Availability”, 2004: summary.
• Gruen, Corsten, Bharadwaj, “Retail Out-of-Stocks: A Worldwide Examination”, GMA, 2002: full study (PDF).
• ECR UK / IGD on-shelf availability measure: On-shelf availability: the case of a UK grocery retailer.