Question 1

What service level should I target?

Accepted Answer

Most companies target 90-95% for B items and 95-99% for A items (high-value or critical). Going from 95% to 99% roughly doubles safety stock. The optimal service level balances holding cost against stockout cost — if stockout cost is 10× holding cost, higher service levels are justified.

Question 2

How do I estimate demand standard deviation if I lack historical data?

Accepted Answer

Use the coefficient of variation (CV) approach: if demand is 'somewhat variable,' assume CV = 0.3 (σ = 0.3 × mean). For stable demand, CV = 0.1-0.2; for erratic demand, CV = 0.5+. Alternatively, start with a safety factor of 1.5-2× average weekly demand and refine as data accumulates.