I will consider two definitions of service level. One is the probability that the next customer demand will be supplied immediately off the shelf. This definition is often used in theoretical work. It is applicable to both individual items (products) and the entire inventory. It can be considered to be the instantaneous service level because it can change quickly. The other definition which I will consider is the percentage of customer demands which are supplied immediately off the shelf. By its very nature, it applies to a particular period of time, e.g. a day or a week or a month. It is the average over that period of time of the instantaneous service level mentioned above. This definition is suitable for use in relation to the entire inventory. It is not very suitable in relation to individual items.
The instantaneous overall service level mentioned above is, roughly speaking, equal to the percentage of fast moving items which are in stock. To be precise, it is the sum of the demand transaction rates for all items which are in stock divided by the same type of sum for all items. As mentioned above, the instantaneous service level can change quickly. For that reason, I suggest that the service level be measured by dividing the sum of the square roots of the demand rates for items which are in stock by the same type of sum for all items. This will give a more stable estimate of the overall service level.
In many organisations, especially retailers, it is not possible to capture customer demands. Fortunately, the method of measuring the service level described above is not normally greatly affected by using sales data instead of demand data.
There is one important limitation. That is that the computer records need to give a reasonably reliable indication as to which items are in stock. Methods of achieving that reliability will be given in later articles.
There is open source software available for measuring overall service levels in the manner described in this article. For information concerning that software, click here.