Revisiting service-level measurement for an inventory system with different transport modes

In a stochastic supply link between a supplier and a receiver the receiver will call upon the supplier who can replenish his inventory at the lowest total cost. This total cost typically contains the order costs, transportation costs and inventory costs. A crucial component of the total inventory costs are the costs of safety stock, which is held by the receiver to protect against stockouts. The optimal amount of safety stock can either be derived from the cost of a stockout or from an imposed service level. Since the cost of a stockout cannot always be determined easily, the service-level approach is a common point of departure for practitioners and academics. Several ways are discussed in the literature to specify the service level, and the definition used can have an important impact on the derived level of safety stock. In this paper the literature on the inventory-theoretic framework for transport selection is surveyed, with particular emphasis on the criterion that is used to establish safety stock levels. A case study based on real-life data is then presented to illustrate the impact of two different service-level definitions on the total logistics costs.