I'm in the process of calculating inventory levels for a bunch of SKUs and I'm wondering if you all-mighty statisticians had any card up your sleeves that I could borrow.
Here's the deal: service levels are inevitably going to be affected by the amount of material I decide to put in stock. The more I stockpile, the higher the fill-rate will be (but of course inventory doesn't come cheap). The less I keep on-hand, the higher the chance of having a stock-out.
I have to strike a balance between holding costs, and service level.
Based on past sales, I was able to plot the expected fill-rate against the volume of on-hand materials. Check it out:
As you can all see, the service level increases very rapidly at first, but then the growth rate starts decreasing quite abruptly. Going from 90% to 100% requires 9 times the amount of material it took to go from 0% to 90%.
Now, getting to the point, is there any scientific way to tell where I should stop? How do I know when the marginal increase in fill-rate is too little for that much of an increase in stocked volume?
I know choosing the right service level is mostly a "political" decision, but I really hoped that you guys could come up with some kind of suggestion to help me in the process. I'm kinda out of my element here.
Thank you guys for your time!