Lead-Time Changes the Game!!
About a year ago we placed an order for a humidifier I found online and when we were presented with the delivery date, it was 3 weeks from my purchase date! From being in Supply Chain for a number of years, I understand things take time to ship, but in today’s world of same day, or even next day delivery 3 weeks was not going to work. One of my first thoughts was, where in their supply chain network is something going wrong and of course my mind always goes to lead time. When looking at a business’s total lead time you have to keep in mind that it is the amount of all processing time, transit time and time spent as inventory. It is the true time it takes for materials to travel from the beginning network at the supplier to the distribution centers and finally to the customer.
We ended up finding another supplier who was able to deliver in 1 week and thus gaining our business, growing their market share and possibly getting a new customer.
Why did this happen, well, we will take a look at this in the article and talk about why shorter lead times are so critical.
We, consumers, do not like to wait, whether it’s waiting to receive your food at a restaurant, waiting in a security line at the airport, or waiting to receive an online order, we can all agree that the shorter the wait, the better. How are you supposed to compete in a world that craves instant gratification?
You may not always be able to give your customers what they want immediately, but you can actively work to reduce how long they have to wait. In this article, I’ll introduce you to the concept of lead time management and outline a few tools and strategies that you can employ to address unnecessarily long wait times. This could be the very thing that helps your organization improve your cash position, improve your market share and help in the reduction of you and your customers inventory.
Customer satisfaction is the result of increased value for your working capital and reduced lead time. In other words, the shorter lead times that you have, the happier customers are because they feel like they’re getting the best bang for their buck. Higher customer satisfaction means more new customers, more retained customers, more orders…and more profit.
In an ideal world, you would have zero lead time, although this may seem somewhat theoretical, customers have good reasons to expect just as much. When considering lead time management, always think about it from your customers perspective as well as your company being a customer to your suppliers. Lead times exist in different forms based on different business processes. For instance, there is time-to-market, product development lead time, material procurement lead time, recruitment lead time, sales order processing lead time, decision-making lead time, and project approval lead time. Although there are many different business processes with their own lead times, the common goal is to reduce all of the lead times through effective lead time management.
There are 4 different forms of lead-times:
Purchasing / Procurement Lead Time: Purchasing lead time refers to the time period between the placement of an order and the delivery of the purchase. Purchasing lead time is similar to customer lead time. Procurement lead time refers to the time from when a business identifies a supply need and when the supplies actually arrive. It is common for certain businesses that the procurement lead time is longer than the purchasing lead time.
Manufacturing Lead-Time: Manufacturing lead time is the time period between the availability of raw materials and the completion of the product. Depending on the product this can be measured in minutes, hours, days, weeks or months.
Supplier Lead-Time: Supplier lead time refers to the time period when a manufacturer or re-seller has to wait for a supplier to deliver an order. Supplier lead time is very important for manufacturers and re-sellers because this influences their total lead time including the purchasing lead time and customer lead time.
Customer lead-Time: Customer lead time starts when a customer has placed an order and ends when the customer has received the product or when the service has been completed. This includes the time it takes for the order to be processed, work to begin on the order, the manufacturing period (if applicable) and how long it takes to be delivered.
Lead-time has a strong effect on the volume of your inventory and focusing on its reduction should be a top priority in your inventory management program. Too much lead time ties up cash in a large inventory – cash that could be used to get more sales or to price your products more competitively.
Dr. Suri, in his Book, “It’s About Time”, talks about the reduction of lead time needs to be every organizations first priority. Suri talk about the response time spiral which is a direct correlation to lead time and how it’s affected for every parts of the Supply Chain lead-times. “For example, in a make-to-stock business, long lead times will lead to inaccurate demand forecasts. As a result, customers will increasingly ask for urgent jobs, which will delay regular jobs, so that these are delivered late. This leads to the (incorrect) conclusion that the lead times, on which the planning is based, should be raised even more. In the next planning cycle this will however result in an even more inaccurate planning, more urgent jobs, more delay, and then the response-time increasing spiral starts again.” (Suri, 1998.)
Lead time can be divided into two sets of activities: value-added activities and non-value-added activities. The former are things that the customer actually pays for; the latter are periphery and support activities that add to the product's price without increasing its value. Value-added activities must satisfy 3 criteria:
- Work that the customer is willing to pay for
- Work that physically transforms the product (or document/information)
- Work that is done right the first time
You can use the acronym CPR to help you remember, Customer pays for it, Physically transforms the product, Right the first time.
Examples of Non-value activities, to which some are necessary on a small level are:
Extra motion, excessive transportation, rework, inspection and many others to which add a significant amount of lead time and in the end increase the volume of inventory, both in your organization and your customers.
There are a few strategies that can be implemented, some quicker than others to aid in the reduction of lead-times.
Use a domestic supplier, increase order frequency, provide forecasts, convert to standard components, consolidate suppliers, (this include freight companies), kitting, vendor managed inventory, consignment, incentives and communicate often.
Reducing lead-times is the single most important activity any organization can do to change the game, not just for yourself but for your customers and your suppliers. If you are not constantly and actively working on reducing your lead-times, your competition will. The total cumulative reduction of lead-times can be achieved anywhere between 20% and 40%.
When working with my supplier partners, some of the tools we have been successful with, are root cause brainstorm matrix, priority charts, detailed value stream maps and many others. The most effective way to accomplish true, sustainable metrics and results, is to get everyone within the supply chain path involved, from order entry to shipping. Instilling a culture of lead-time reduction into the DNA of your organization, will ensure you reap benefits many times over and as history has told us, there will always be good time and unfortunately there will be slow times and if you have an organization that is lead-time reduction focused, you will be able to weather the storm much easier than your competitors.
Never be satisfied with your current lead-times and remember, lead-time reduction changes the game in a big way!!
For questions or assistance in helping your organization reduce lead-times, reach out at [email protected]
Suri, R. (1998) It’s About Time. https://www.rajansuri.com/books