When it comes to lead times, the days of making impulsive or unstrategic decisions are behind us.
Where long lead times were once nearly impossible to predict, modern technologies and forecasting strategies can help your company better prepare for all types of supply chain situations. Harnessing advanced solutions for lead times means staying ahead of your demand planning and inventory management.
Welcome Back to Our ‘7 Essential Steps’ Series!
We hope you enjoyed last week’s post on demand forecasting. Today it’s onto the second essential step of ‘getting it right’ in the purchasing process… Lead time forecasting!
Lead time forecasting is a critical and often overlooked component of demand planning and replenishment. For many retail and wholesale distributors, this is the first time you will put the words “lead time” and “forecast” together.
Since supply chain experts do not have a crystal ball for lead time predictions, we need to adopt a more methodical approach to calculating safety stock in terms of lead times. Data-driven decision-making (DDDM) is key to improving accuracy and driving more substantial results.
It makes a ton of sense when you think about it. With service and inventory performance at stake, why would you put tremendous resources into demand forecasting for your customers without giving the same attention to describing suppliers’ lead times? Lead time forecasting intelligence needs and deserves the same level of sophistication as demand forecasting!
Get Off the ‘Worst-Case-Scenario’ Train!
Supply chain and retail professionals have followed an interesting yet costly buying pattern for decades. While analysts are comfortable with a demand forecast that cuts through the middle of their demand history, lead time forecasting tends to send us spiraling into a worst-case scenario.
If the deliveries have been averaging 8 to 12 days, you are often more likely to see a 12-day lead time set rather than the average of 10.
At the same time, an item that historically sells between 50 and 150 will have a demand forecast of 100.
The first step of the lead time forecasting process is to treat the lead time value as a forecast rather than a setting.
If you have this mindset, great results will follow.
Supplier and Item Lead Time Forecasting
A strong lead time forecasting process analyzes the main receipt history and offers a supplier lead time forecast, but also offers item-level lead time forecasting for those items that are being scratched or short-shipped frequently.
The need for unique item-level lead time forecasting typically varies by industry. Industries where suppliers have poor and inconsistent delivery performance — such as furniture distribution — will benefit from item-level lead time forecasting.
Just like in demand forecasting, gather as much lead time history as possible. Your data is extremely valuable. Years of lead time history and real-time analysis will allow you to put inventory behind the winning SKUs.
Key Components
Similar to the demand forecasting process, there are 3 critical attributes of lead time forecasting: Lead Time Forecast, Lead Time Deviation, and Lead Time Seasonality. When done right, lead time forecasting delivers precision in all 3.
1. Lead Time Forecast
Start with the actual lead time forecast value, but don’t stop there. Offer as much history as possible. An intelligent forecasting method will tell you how much to use for each supplier and item. You can find this in today’s advanced cloud-native solutions for forecasting.
2. Lead Time Deviation
The deviation describes the reliability of the supplier and their performance.
Similar to the demand deviation, the higher the lead time deviation, the more safety stock will be required. This additional safety stock becomes part of the inventory operating expense and will negatively impact the profit of an item.
Your suppliers need to know, and so do you.
Suppliers need to realize that their consistency is just as important as their length of lead time. A lead time of 10 days that varies from 6 to 14 days will likely cause more inventory expense than a consistent lead time of 11 days. The extra safety stock will absolutely impact your inventory operating expense.
3. Lead Time Seasonality
Yes, your lead time deliveries also experience seasonal fluctuations. Accounting for these seasonal shifts can help your company improve the customer experience while minimizing supply chain cost spikes.
Common causes of seasonal delivery changes include:
- Seasonal weather conditions.
- Supplier plant shutdowns.
- Employee vacations.
- And plenty of other pains in the #$%!
In fact, it is often your own receiving departments that cause these seasonal changes! Your safety stock calculations and processes need to read these seasons and help you react.
Here’s how you can keep control over the situation. Just like with every component, your company needs to maintain lead time values proactively, as they influence the decision of ‘when to buy’ as much as they influence the obvious decision of ‘how much to buy.’ An accurate lead time calculation strategy will help you ensure you’re correctly timing inventory purchases, which can cut costs elsewhere in the supply chain.
The Financial Impact of Long Lead Times
Yes, your lead time deviation will influence your safety stock needs. But so will the length of the lead time.
A lead time of 100 days will require a much greater safety stock amount than a lead time of 10 days. Purchasing for a time 3 months from now reduces your confidence in how much you will sell during that period.
In fact, of the various safety stock components, your lead time can have the most influence when the lead times grow to several weeks and beyond. When purchasing import items with a goal of achieving lower pricing, it is important to analyze the additional cost of the safety stock.
