On The Importance of Lead-Times

If your company is like most, you’ve undertaken multiple initiatives in the last 5-10 years to take inventory out of the supply chain. One or more of these initiatives has probably focused on improving forecast accuracy or installing advanced planning systems – both valuable areas of focus – as the means to reduce inventory levels.

Unfortunately, such initiatives frequently gloss over the topic of lead-times, using worst-case lead-time scenarios as the assumptions that feed new planning systems. These assumptions are rarely if ever updated, and worse yet, little if anything is done to improve actually lead-time performance. In fact, lead-time is one of the most important factors that drive cycle and safety stock, and tremendous gains can be realized by focusing on and improving lead-times.

Getting to know lead-times

Most people think of “lead-time” as the time it takes to get a direct material order from a given supplier or plant. While order-to-delivery is an important part of lead-time, classic inventory formulas – which underlie all inventory planning systems – also include all of the steps between hitting a reorder point and placing a replenishment order, as well as the time it takes to receive inventory, as part of lead-time:

In addition to inventory lead-time, forecast lead-time also has an important effect on inventory. Forecast lead-time is the delay between receiving customer demand information and generating an updated demand forecast:

The opportunity in lead-time reduction

There are two types of inventory at every stage in your supply chain: cycle stock and safety stock. Cycle stock is the material you need to cover average demand during the inventory lead-time period. Safety stock is the material you keep ‘just in case’ to cover the variability in demand (versus forecast) and in lead time itself during the inventory lead-time period — in other words, it’s extra material to cover spikes in demand and unusually long resupply periods:

Note: assumes equal cycle and safety stock, and order quantities set to cover lead time interval

Those forecasting and planning initiatives we talked about earlier focus on reducing safety stock through better forecasting, and on getting the total of cycle and safety stock ‘right’ across every product in your supply chain. For many companies these initiatives significantly reduce total stock; in other cases, results have been less pronounced and occasionally counterproductive (for botched implementations).

Could you get comparable benefits by focusing on lead-times? Let’s say you were able reduce inventory and forecast lead-times by 50% – a number of interesting things happen:

	First, the cycle stock you need to cover average demand during the lead-time period drops by 50%
	Second, the period of time your forecast needs to cover is also 50% less, meaning that for the same ‘quality’ forecast, variability and therefore safety stock is reduced by 29%*
	Third, not only do your forecasts cover a shorter period of time, they also improve in quality because that time period is not so far in the future (think of the difference between a 1-day and 5-day weather forecast). A 25-50% improvement in forecast quality can further reduce safety stock by the same amount – 25-50%

In other words, if you could reduce lead-times by 50%, your company could realize a 48-57% reduction in total inventory. That means 75-108% faster turns and 48-57% less money tied up in inventory and exposed to obsolescence risks.

How to get the lead-time out

The good news is that in most cases, reducing lead-times is not about a massive or capital intensive restructuring of the physical supply chain. Reducing lead-times is about speeding up information flows and changing the way processes work across and within companies.

That’s where Co-Plenish comes in. We have experience in improving business processes for the supply chain, and with relevant supporting technologies, so we can help you squeeze lead-time out of your supply chain.

Because after all, lead-time is money.