Customer Service Level Analysis

Quantification of the reduction in annual expenditure due to a 2% reduction in the target customer service level

Background

Our client, in response to Defence's 5% sustainment expenditure cuts, has targeted savings of $6.25m in FY 08/09. GRA has been engaged to help our client deliver $6.25m savings.

As our client has been consistently over achieving its service level targets for consumable inventory by 3% – 5%, one initiative that GRA has investigated was an analysis of the financial benefit for a small reduction in the target service level in the client requirements determination tool.

Challenge

GRA analysed the size of the expenditure reduction if our client planned its stocking policy based on a reduction in the consumable inventory target service level from 95% to 93%.

Approach

GRA performed a Baseline Cost Analysis before adjusting the target service level down from 95% to 93%

• establishment of a simulation environment and capture of the baseline projected purchase plan (AS-IS)
• adjustment of target service level down from 95% to 93% (i.e. a reduction of 2%)
• run our optimization engine and capture of the simulated projected purchase plan
• comparison of the simulated and the baseline projected purchase plans and impact on each department

Outcome

The new total purchase recommendations represent $32.24m, with a total potential saving of $0.71m. 2% reduction of the target service level generates 2.2% reduction of the purchase order plan for the next 12 months.

Moreover, each major inventory segment was impacted at a different degree, from 2.1% purchase order reduction to 5.6% purchase order reduction.