When Fill Rate Becomes a Liability

Fill rate is one of the most cited metrics in distribution.

It is also one of the least questioned.

A ninety eight percent fill rate sounds strong. A ninety nine percent fill rate sounds elite. Sales teams like it. Customers expect it. Operations tracks it daily.

The issue is not whether fill rate matters. It does.

The issue is when the pursuit of incremental fill rate erodes capital efficiency and masks structural problems.

Several owners have told me that they increased inventory depth in the name of service, only to find that working capital tightened, slow moving stock accumulated, and margin returns declined. The decision did not feel reckless. It felt customer focused.

The tradeoff was simply not quantified.

The Hidden Cost of the Last Two Percent

Improving fill rate from ninety percent to ninety five percent often requires better forecasting and basic stocking discipline.

Improving from ninety seven to ninety nine percent is different.

That final stretch usually requires disproportionate inventory investment in low velocity items. It requires broader SKU coverage. It requires safety stock built around variability rather than demand.

Each additional point of fill rate is not linear in cost.

Inventory increases.
Carrying costs increase.
Obsolescence risk increases.
Complexity increases.

The revenue impact of that incremental availability is often assumed rather than measured.

In early 2025, when cost of capital remains meaningful, those assumptions deserve scrutiny.

Service Versus Capital Alignment

The core question is simple.

What service level is strategic, and what service level is habitual?

If your value proposition centers on immediate availability for emergency driven customers, high fill rate is central to the model.

If most orders are planned and predictable, extreme fill rate targets may not create proportional value.

Several owners have shared that when they segmented customers by urgency and order pattern, they found that a portion of inventory was dedicated to protecting against rare events.

That inventory may still be justified. The point is clarity.

Fill rate should align with service promise, not internal pride.

Measuring What Matters

Fill rate is typically measured as the percentage of line items shipped complete on first pass.

That metric does not capture:

Profitability by SKU.
Contribution margin by customer.
Capital tied to slow moving coverage.
Frequency of emergency orders versus planned demand.

A distributor can achieve high fill rate by carrying extensive inventory across broad categories. The balance sheet absorbs the consequence.

It is more useful to examine fill rate alongside:

Days inventory outstanding.
Gross margin return on inventory investment.
Stock aging by SKU band.
Order frequency patterns.

When fill rate improves while inventory turns decline sharply, the tradeoff is visible.

The Psychological Bias

There is a cultural element to fill rate.

Operations teams take pride in shipping complete orders.
Sales teams use availability as a competitive argument.
Customers express frustration loudly when items are unavailable and rarely comment when they are.

The feedback loop favors excess.

Stockouts are visible and painful.
Excess inventory is quiet and gradual.

Without deliberate financial review, service expansion can become structural overcommitment.

Where High Fill Rate Is Essential

There are categories where aggressive fill rate targets are not optional.

Safety related products.
Production critical components.
Industries where downtime carries immediate cost.

In those segments, availability is reputation. Understocking can damage long term relationships.

The discipline is not to lower fill rate indiscriminately. It is to distinguish between critical availability and universal availability.

Preparing for the Rest of 2025

As we move through 2025, distributors should evaluate whether current fill rate targets reflect customer value or internal habit.

Ask:

Which SKUs drive most backorders?
Which SKUs drive most capital?
What is the profitability impact of incremental availability?
Are we protecting strategic accounts or padding the tail?

Fill rate is a service metric. It becomes a liability when it overrides capital logic.

In distribution, service and capital must reinforce each other. When they diverge, the balance sheet eventually signals the misalignment.

A disciplined operator does not chase perfection in isolation. They define the service promise clearly and fund it intentionally.