Lead Time is More Than a Number
|View From The Ridge: 82|
November 11, 2016
Vice President, Business Strategy
When someone asks how long it takes to get to work, how do you answer?
I would expect you might give an estimate by averaging out several trips to the office. You might say it takes about 30 minutes, but depending on traffic, it may take as little as 20 minutes or as much as 45. Lead time for your suppliers works in a similar way. The ability for you to verify, monitor, adjust and track variances to the expected performance is critical. Each scheduled receiving exposes the possibility to run out of stock. Demand variability is one reason for this, but quite honestly, lead time variability may be a bigger point of concern. It is just as important to forecast the suppliers’ lead time and calculate the variability as it is to forecast the demand and the amount of variation in the lead-time.
Let’s think back to commute to the office for a moment. If you have a meeting at 9:00am, and it takes about 30 minutes to get to the office, what time do you leave? I would guess somewhere between 8:15 and 8:30 based on how confident you were of the traffic conditions. If you take too much of a risk, you might be late. The exact same thing is true for the receipt of goods from your supplier.
The answer is not necessarily to add to the lead time, because in fact the average might not actually change. The important thing is to understand the variability and decide how much of a risk or how confident you want to be.
Let’s look at an example:
- We have an item that sells 140 per week, with a forecast variation of 15%.
- Sales can vary between 119 and 161, a fairly large range.
- The supplier has stated that their lead time is 7 days.
- Our experience suggests it is closer to 10 and can vary as much as 7 to 13 days.
- Typically, we buy a one-week supply.
- This means that we have 52 receivings per year with an equal number of opportunities to be out of stock.
- The vendor is at their worst and the order in question takes 13 days to arrive.
- The order volume is at the high end of the forecast range, about 160 per week.
- It becomes obvious that we are going to exhaust our safety stock due to both high demand variability and high lead time variability.
- In this example we could miss as many as 100 sales.
Had we done a better job of forecasting the lead time and understanding the variability, we could have protected ourselves with more safety stock to cover uncertainty in the supplier’s ability to perform. Rather than changing the lead time, we should forecast time just like we forecast demand - track the variability, and make a judgment related to the degree of confidence we have in the amount of variability we want to cover with additional inventory. In the example above, the conditions would be worsened still if the supplier does not ship complete.
Just like we don’t want to be late to a meeting, particularly if it’s with our boss, we don’t want to underestimate the lead-time component of our investment decisions. Customers are not likely to be sympathetic to our supplier’s nonperformance.
A benefit of the monitoring process of lead time is the ability to go back to suppliers with hard data showing the amount of investment you must make to accommodate their inability to perform. Someone should pay for that, and it shouldn’t necessarily be you. A strong vendor compliance program is the start of controlling lead time performance. If the supplier knows you are not going to hold them accountable, they may not be overly concerned with their performance. A vendor compliance program needs to set the expectations with your suppliers. These should be simple, measurable, attainable, reasonable and timely. Aside from normal transportation items, the compliance program needs to specify the lead time expectations, allowances for acceptable variation, methods for communicating when these are not going to be met, and most importantly, the consequences of failure.
In order to get lead time under control and more predictable, there are four simple things that can be done.
- Develop a vendor compliance program. This needs to meet the SMART test.
- Be sure you have a way to properly monitor lead-time performance – e.g.: tracking lead time by occurrences, having edits to post lead time once a percentage of product on order has been received, and having edits that preclude old open receivings from distorting the lead time updating process.
- Have a tool that provides both a lead-time forecast and lead time variability.
- Understand what the risks are to customer service when actual lead time is not what you expected.
When you take a step back, lead time should be a focus to maintain high levels of customer service in your organization. Blue Ridge can help you understand your lead time issues and work with you to develop both the vendor compliance programs and implement a lead time forecasting process.