The amount of inventory that we must carry will
be based on the relationship of customer lead time to our cumulative
lead time and delivery lead time, and additional factors such as
capacity constraints, lot sizing policies, and customer service
Inventory is a trading currency. It can be used
to trade for time or capacity. We compensate for the difference
between customer lead time and our logistics pipeline time by
trading time for inventory. When faced with capacity constraints, we
build things earlier than needed to satisfy future demand peaks—trading
inventory for capacity.
We usually meet demand from external customers from either
production or inventory. On a day-to-day basis, the decision will be
based on inventory availability. From a strategic perspective,
however, the decision and supporting systems should be based on lead
time relationships and projected demand versus capacity. Don't use customer
service as an excuse for high inventory levels. You can also
provide good customer service through lead time reduction.
Managing Lead Times to Win the War
The five steps that follow should form the basis
for the campaign to reduce lead times and inventory.
1. Understand Your Lead Times
Use item data and product structures to construct
graphical representations of each product, similar to the flip-flop
bill of material in Figure 3. Not only will this provide a picture
of cumulative lead time, but it will help point out where lead time
reduction efforts should be focused. Understand the detailed
elements that make up cumulative lead time for all your products.
For purchased items, break down the lead times into the tasks that
are performed by your company, your supplier, and other
organizations. Analyze the lead times of manufactured items. Get a
handle on your delivery lead times for each product. How much time
is spent picking, packing, and shipping? What are the transit times
to warehouses, customers, or major geographical areas? Work with
your customers to find out how much time is spent between their
receiving your product and having it available for use.
2. Understand Your Customer Lead Time
This involves knowing what your customers expect
in terms of the time between their giving you an order and their
receipt of the product. As this allowable lead time is most often
influenced by the competition, you need to compare your delivery
times and performance with that of your competitors. Overall, you
need to know if you are losing product sales because the competition
can satisfy the customer faster. Don't forget about the impacts of
cost and quality in this comparison, however.
3. Find the Fluff
Discover the dead space! Bash the bureaucracy!
Recognize the redundancies! Identify the idleness! Qualify the
queues! As you examine each area of your logistics pipeline, look
for waste. Try to identify the candidates for lead time reduction.
Sometimes these are obvious, such as mailing purchase orders to your
suppliers when they could be sent electronically. Others will
require a more detailed analysis; for example, comparing the average
actual manufacturing lead times to those used by your planning
systems. Many of the information systems you currently use can
provide much of this data—use them!
4. Improve Your Systems Support
Make your system give you the data you need to do
the analyses discussed so far. When you find disparities between
actual practice and what the system plans or expects, bring the
system into line. For example, if the system is using 6 days as the
manufacturing lead time, and the actual average is 4 days, change
the planning parameter in the system. Don't stop there. Find out why
the system value was wrong. Was it because it was calculated
using the routing? If so, find the standards in
the routing that are out of whack and correct them.
Review all of the variables used by your system
for planning and scheduling. Look for those that need to be changed
to more closely reflect reality, or that could be modified to affect
a lead time or inventory reduction.
5. Attack the Problems and Improve the Process
It's difficult to wage war on many fronts, so
first of all you must decide where to attack. If you're losing the
battles on delivery in a ship-from-stock environment, you should be
concentrating on the distribution and delivery processes. Reducing
manufacturing lead time can wait for later, when it becomes the
The real key is to focus your initial efforts on
that portion of the cumulative lead time and delivery lead time that
falls within the customer lead time. If the customer lead time
remains constant, your lead time reductions from that end will bring
more of the cumulative lead time within the customer lead time
As you begin to address improvements in
manufacturing processes, focus first on the critical path. In
manufacturing operations, concentrate on the bottleneck resource
within the critical path. You'll probably find that it's a
bottleneck for many of your products. Address manufacturing lead
times on two fronts— increase capacity where it makes sense, and
improve your production methods and processes.
Work with your suppliers to reduce purchase lead
times, again using the critical path of your cumulative lead time
for focus. Remember that as you reduce lead time in one area, the
critical path may change. Keep your cumulative lead time
representations up to date. They should serve as maps and battle
plans in deciding where to concentrate your forces.
There is no truce in the war on lead times. To
fight that war effectively, we have to:
• Understand our lead times and how they are related.
• Establish manufacturing and inventory
policies that reflect these relationships.
• Gather intelligence about where the weak spots are located.
• Seek and destroy the enemy! Wipe out
inefficiencies and waste in our logistics pipeline at the points
where it does the most good in advancing the forward edge of the
• Take a little R&R before the next battle!