Defining Demand Forecasting Demand forecasting as the term suggests is predicting the need for a...
Fill rate can be defined as the percentage of customer demand that was fulfilled with stock in hand.
If this looks like an oversimplified definition, it probably is. The idea behind the fill rate is to make sure the customer is satisfied by getting what they want and when they want. In an ideal scenario all our customers who order online or visit our stores should be immediately (or with some help) to be able to find what they came looking for.
Most of the time when customers walk in a store if you are lucky they will ask someone from the staff if they are not able to find what they came to buy. But in most cases customers browse and they walk away unsatisfied. Even when they talk to the staff, this feedback is not rarely captured.
That is why it is important to invest in modern demand forecasting solutions that can help you figure out, how much of this unobserved demand was lost.
So coming back to fill rate, if we have a demand forecast, we can say fill rate to be:
Fill rate = Stock available / Demand forecast for the given period
Fill rates are tied directly to the customer satisfaction rate. Any customer demand that goes unfulfilled would lead to either customer substituting the item with something else or coming back later, but in most cases (ranging from 21% to 41%), the customer would get the item from your competition.
Although the retail operations have gone a sea change in the last couple of decades due to the advent of technology and globalization. But still, many retailers are working with gut-feeling for their forecasts.
One reason forecasts are challenging is because most of the retailers have thousands (or millions) of SKUs and scores (or hundreds or thousands) of stores. So first of all, knowing demand for a given SKU and store location is not a job for manual calculations, neither can it be done by simple spreadsheets (which are pervasive in any planning process).
Another reason is that forecast is not one thing. To properly plan and successfully keep the fill rates up, not only stores need to know their demand forecasts, but distribution hubs, warehouses, manufacturers and even raw material suppliers need to know their forecasts. And add to it the complexity of lead time and seasonal demand, forecasting is best done by specialists.
According to recent studies, 95% and above fill rate is where most of the industry leaders are, anything below 92% is the bottom quartile. So, there you have it, to match or beat your competition, the fill rate you are looking for is 95%.