Perhaps the best way to manage product service levels is to take into account
both the profit contribution and the individual product demand.
We can bring both these measures together in the form of a simple matrix in
Figure 2.12. The matrix can be explained as follows.
48 LOGISTICS & SUPPLY CHAIN MANAGEMENT
Quadrant 1: Seek cost reductions
Because these products have high volume it would suggest that they are in frequent
demand. However, they are also low in profit contribution and the priority
should be to re-examine product and logistics costs to see if there is any scope for
enhancing profit.
Quadrant 2: Provide high availability
These products are frequently demanded and they are more profitable. We should
offer the highest level of service on these items by holding them as close to the
customer as possible and with high availability. Because there will be relatively few
of these items we can afford to follow such a strategy.
Quadrant 3: Review
Products in this category should be regularly appraised with a view to deletion from
the range. They do not contribute to profits (or at least only marginally) and they are
slow movers from a sales point of view. Unless they play a strategic role in the product
portfolio of the firm then there is probably a strong case for dropping them.
Quadrant 4: Centralised inventory
Because these products are highly profitable but only sell at a relatively slow rate
they are candidates for centralised management. In other words, they should be
kept in some central location, as far back up the supply chain as possible in order
to reduce the total inventory investment, and then shipped by express transport
direct to customers.