Hardgoods Industry Face Shockingly Expensive Challenge
Long lead times frustrate buyers, jeopardize service levels, and in the end, steal profits. For inventory professionals in hardgoods industries, the lead-time component can be known as the sleeper component, the missing component, and often the killer component.
Lead Time: The Sleeper Component
Let’s face it. Many times, companies put the vast majority of time, resources and advanced math in forecasting customer demand. After all those resources are invested, when it is time to forecast our suppliers and their lead times, they typically shoot from the hip. This leads to missed service, expensive lead time ‘cushioned’ inventory, and overall frustration for customers and stakeholders.
To add insult to injured profits, blame is placed on the demand forecasts. When actually, the sleeper component has again reared its ugly head.
An argument can and should be made that items deserve as sophisticated a lead-time forecast as they do a demand forecast. Food industries have short and consistent lead times, which are often less than 7 days. Hardgoods industries don’t have that luxury. If your supplier is shipping to you at a rate of 89%, and you have to turn around and deliver to your customers at a rate of 94%, you need lead time forecasting support! It’s time to wake the sleeping giant that is Lead Time Forecasting.
Lead Time: The Missing Component
Lead Time is part of any replenishment strategy and buying calculation. Today’s reality is that most buyers still use a ‘worst case scenario’ when determining a lead-time forecast. If their experiences in recent months range from lead times of 21 to 38 days, you can bet that 38 will be the number! Just imagine if your demand forecasting always used a worst-case scenario.
There is typically at least a 10% inventory cushion from exaggerated lead times, but the problem does not stop there. There is also missed service from several areas. Long import lead times are screaming for attention in many ways. First, a lead time of 60 days or longer actually becomes your number one safety stock driver. The analysis across the Hardgoods industries shows an incredible average safety stock of 47 days for items with lead times above 60 days, where a nice 7 day lead time typically averages only 5 days of safety stock required. This means that you can forecast the lead time perfectly and still miss service due to the fact that there is a large void in safety stock.
In addition, most inventory professionals are not including the critical factor of Lead Time Deviation into the mix. Some of your import suppliers have long but consistent lead times, while others can deviate a month of more! This lead-time deviation is a critical measurement that again plays into your safety stock.
Lead Time: The Killer Component
Lead-time measurement is a critical responsibility of a strong buying strategy. Profits will suffer on long lead time items if you don’t monitor the margins and make smart service level goal decisions. Requesting to be in stock 98% of the time is much less costly on a 7-day lead time than a 90 day lead time. In addition, you have to make sure your calculations understand how to adjust your safety stock to even achieve something in the high 90s. Simply adding 2 or 3 weeks for safety stock does not cut it on those items.
Throughout the Hardgoods industries, long lead times in general require a deep investment just to maintain day-to-day service levels. It’s the nature of our items.
Killer Warning: If you were to suddenly insert our long lead times to any food industry distributor, without adjusting their margins up and their service goals down, they would be out of business before the next season.
Does your buying system or buying strategy put the required resources into lead-time forecasting and lead-time management? Do your category management professionals understand the profit impact of long and erratic lead times and utilize that information when making decisions on the item mix, the import or domestic source, the service level goal, and the sales price to your customers?
If not, educate yourself and your team, then get real about your need for an advanced replenishment solution that gets it!