Two Metrics That Sound the Same
Walk into any supply chain discussion and you'll hear "service level" and "fill rate" used interchangeably. They're not the same thing. Using them incorrectly leads to misaligned goals, frustrated stakeholders, and inventory decisions that don't actually improve customer experience.
Understanding the difference helps you measure what actually matters for your business.
What Service Level Measures
Service level (sometimes called cycle service level or Type 1 service level) measures how often you have stock available when demand occurs.
Service Level = Number of Demand Periods Without Stockout / Total Demand Periods
Think of it as answering: "What percentage of the time can we say yes when customers want to buy?"
Example:
Over the past 52 weeks, you experienced stockouts during 4 weeks.
Service Level = (52 - 4) / 52 = 92.3%
Service level is a binary measure per period—you were either in stock or you weren't. It doesn't consider how much demand you satisfied or how badly you stocked out.
What Fill Rate Measures
Fill rate (sometimes called demand fill rate or Type 2 service level) measures the percentage of demand you actually fulfilled.
Fill Rate = Units Shipped / Units Ordered
Think of it as answering: "What percentage of what customers wanted did we actually deliver?"
Example:
Customers ordered 10,000 units. You shipped 9,400 units (600 units were backordered or lost due to stockout).
Fill Rate = 9,400 / 10,000 = 94%
Fill rate is a volumetric measure—it considers the magnitude of shortfalls, not just whether they occurred.
Why the Difference Matters
Consider two scenarios with identical service levels but very different fill rates:
Scenario A:
- 52 weeks
- Stocked out during 4 weeks
- Average demand per week: 100 units
- Stockout weeks: Missed 10 units each time
- Service Level: 92.3% (48/52 weeks in stock)
- Fill Rate: (5,200 - 40) / 5,200 = 99.2%
Scenario B:
- 52 weeks
- Stocked out during 4 weeks
- Average demand per week: 100 units
- Stockout weeks: Missed 100 units each time (complete stockout)
- Service Level: 92.3% (48/52 weeks in stock)
- Fill Rate: (5,200 - 400) / 5,200 = 92.3%
Same service level. Very different fill rates. Scenario A has minor stockouts; Scenario B has complete stockouts. Your customers would have very different experiences.
Which Metric Should You Use?
Use Service Level When:
Setting safety stock. Most safety stock formulas are designed around achieving a target service level (cycle service level). The Z-value in the formula corresponds to your desired service level.
Planning is your focus. Service level answers "how often will we be in stock?" which is the planning question.
You need simplicity. Service level is easier to calculate and explain.
Use Fill Rate When:
Measuring customer impact. Fill rate directly measures what customers experience—did they get what they ordered?
Reporting to customers or retailers. Retail buyers care about fill rate. "You only filled 85% of my PO" is more tangible than "you had a 90% service level."
Understanding severity. Fill rate distinguishes between minor shortfalls and major stockouts.
Driving operational improvement. Fill rate often correlates more directly with customer satisfaction and retention.
Converting Between Metrics
Fill rate is always higher than or equal to service level for the same inventory policy. This is because service level counts any stockout as a failure, while fill rate gives partial credit.
The relationship between them depends on demand variability and order patterns. In general:
- Higher demand variability: bigger gap between metrics
- More frequent small orders: metrics converge
- Less frequent large orders: metrics diverge
There's no simple formula to convert. You need to calculate each from your actual data.
Calculating Service Level
Weekly or periodic basis:
1. Define your period (week, month)
2. For each period, mark whether you had any stockout
3. Count periods with full availability
4. Divide by total periods
Order-based:
1. Count total orders received
2. Count orders you could fill completely
3. Divide complete orders by total orders
Calculating Fill Rate
Unit-based:
1. Sum total units ordered
2. Sum total units shipped
3. Divide shipped by ordered
Line-based:
1. Sum total order lines
2. Sum order lines filled completely
3. Divide filled lines by total lines
Order-based:
1. Count total orders
2. Count orders filled 100% complete
3. Divide complete orders by total orders
Different definitions serve different purposes. Unit-based is most common for inventory analysis. Line-based and order-based are common for customer-facing metrics.
Target Levels by Metric
Because fill rate is typically higher than service level for the same inventory, targets differ:
| Product Class | Service Level Target | Fill Rate Target |
|---------------|---------------------|------------------|
| A-items | 95-98% | 98-99.5% |
| B-items | 90-95% | 95-98% |
| C-items | 85-90% | 90-95% |
If you're told "we need 95% service," clarify which metric is meant. Meeting 95% service level is very different from meeting 95% fill rate.
Retail and Distribution Considerations
Retailers often impose fill rate requirements with penalties for non-compliance:
- Target: 95-98% fill rate on POs
- Chargebacks for shortfalls
- Risk of delisting for chronic underperformance
For these relationships, fill rate is the primary metric. Plan safety stock and review performance against fill rate, not just service level.
OTIF (On-Time In-Full) is a related metric that combines fill rate with delivery timing. You only get credit for orders delivered complete AND on time. Walmart and other major retailers emphasize OTIF heavily.
Improving Each Metric
To Improve Service Level:
Focus on having stock available more often:
- Increase safety stock (directly improves service level)
- Reduce lead time variability
- Improve forecast accuracy
- Review more frequently
To Improve Fill Rate:
Focus on satisfying more demand during stockouts:
- All of the above (fewer stockouts helps both metrics)
- Improve order allocation when stock is limited
- Enable partial shipments instead of all-or-nothing
- Better demand sensing to avoid deep stockouts
Common Misunderstandings
"We have 95% fill rate, so our service level is 95%"
Wrong. These are different metrics. Your service level could be 85% or 99% depending on your stockout patterns.
"Fill rate above 100% is good"
You can't fill more than 100% of what was ordered. If you're calculating above 100%, something is wrong with your data or methodology.
"Higher is always better"
Both metrics have diminishing returns. Going from 97% to 99% often costs more in inventory than going from 90% to 95%. Target the level that balances cost and customer needs.
"We can use them interchangeably"
You can't. They measure different things. Decisions based on the wrong metric lead to wrong outcomes.
Key Takeaways
- Service level measures how often you're in stock (binary per period)
- Fill rate measures what percentage of demand you satisfy (volumetric)
- Fill rate is typically higher than service level for the same inventory
- Use service level for safety stock planning
- Use fill rate for customer-facing performance measurement
- Clarify which metric is meant when targets are discussed
- Retailers typically require fill rate (often via OTIF metrics)
- Both metrics have diminishing returns at high levels
Frequently Asked Questions
Which metric do safety stock formulas use?
Most common safety stock formulas (like the Z-score method) are designed around cycle service level. The Z-value (1.65 for 95%, etc.) corresponds to how often you want to be in stock during a replenishment cycle.
How do I explain the difference to my CFO?
Service level is like "how often is the store open." Fill rate is like "how many customers leave with what they came for." A store can be open 95% of the time (service level) but still only satisfy 80% of customer demand (fill rate) if it's frequently out of stock on key items.
What's a reasonable target for each?
For most CPG brands: 95% service level on A-items translates to roughly 98% fill rate. Actual relationship depends on your demand patterns. Calculate both from your data to understand the relationship in your business.
Should I track both?
Yes. Service level helps you plan inventory. Fill rate helps you measure customer impact. They tell you different things, and both are valuable.
What about backorders?
How you handle backorders affects fill rate calculations. If backordered units are eventually shipped and counted, fill rate improves. If they're canceled, they count as unfilled demand. Define your methodology consistently.