Service and cost

A supply chain is judged on two things: how well it serves customers and what it costs to run. They pull against each other. You can almost always improve one by spending more of the other, so the skill is getting a good balance.

Service is usually measured with a few numbers. Fill rate is the share of what customers ordered that you shipped straight away: if they ordered 1,000 units and you shipped 950, the fill rate is 95%. On time in full (OTIF) is the share of orders that arrived on the agreed day with everything on them. A big retailer may fine a supplier for every order that isn't OTIF.

Cost is more than the price on an invoice. Total landed cost is everything it takes to get a product onto your shelf: the price, freight, insurance, import duty, customs brokerage and handling. A cheaper supplier on the other side of the world can end up costing more once it lands.

Then there's the cost of holding stock, and the cost of not having it. Stock ties up cash, takes warehouse space and can go out of date. Running out loses the sale, sometimes the customer, and often means paying for rush delivery.

Not every product needs the same balance. A hospital wants close to 100% availability of life-saving drugs, whatever it costs. A shop selling 3,000 items might aim for 99% on its best sellers and accept 90% on slow-moving ones. Deciding where to be fast and where to be cheap is one of the main jobs of supply chain strategy.