Bruce E. Jacobs10.27.08
It’s the Lead Time
By Bruce E. Jacobs
The time value of money never has been so intuitively obvious than in lead times: the lead time to produce, lead time to order, lead time to replenish inventory, lead time to acquire product from foreign providers, lead time of suppliers, lead time for product development and approval, lead time for FDA approval, etc. The fundamental axiom is the longer the lead time for any process or activity to be completed, the greater the total cost structure incurred. The medical device industry is notorious for incurring long lead times (generally, any industry that is highly regulated will fall victim to this). Unfortunately, there is no correlation between long lead times and higher quality, lower costs, better service or responsiveness. The one correlation that does exist is the total cost structure increases as lead time expands.
In today’s business climate, where “faster, cheaper and better” is the common demand of customers, lead time is the basic principle that most affects successfully achieving these demands. Faster cannot be achieved when lead times are long. Cheaper cannot be achieved because longer lead times drive greater costs, and shorter lead times that don’t maintain or improve quality are lunacy. To achieve lead time improvement creates order-of-magnitude gains in products, services, responsiveness and overall costs that are recognized by the customer. To provide products faster, the lead time must be improved or the costs will increase. The principle of lead time never has been more clearly defined than in the following theorems:
1. When the lead time to manufacture the product and fill the customer’s order is greater than the customer’s order placement to delivery lead time, the product provider must fill the order from inventory.
2. When the order fill rate of the provider is less than the order fill rate required by the customer, the product provider must fill the order from inventory to maintain the required fill rate.
In the first theorem, the lead time of the provider being greater than that of the customer requires inventory and, consequently, an enormous cost infrastructure to support the inability of the provider’s lead time to equal that of the customer. The second theorem demonstrates dis-synchronization between the provider’s and customer’s lead times, requiring the provider to carry more inventory to meet the customer’s order fill rate requirements.
Lead Time Drivers
There are many explanations for why lead times are so long. Most are factual but not relevant. For example, offshore suppliers’ lead times could range from nine to 12 weeks, consisting of four to six weeks for the supplier to put the order into its schedule and acquire raw materials, one to two weeks to manufacture the product, three weeks on the water and one week through customs and delivery into available inventory. An analysis of the lead time indicates that only approximately 11%-17% of the total lead time is consumed by value-added activity—manufacturing. That leaves as much as 89% of non-value-added lead time.
In addition, the customer also is accumulating costs during the lead time. These costs include order management and expediting, clearing customs and transportation—not to mention the capital invested in safety stock inventory to meet customer orders until the supplier quantity is delivered, in addition to the carrying costs associated with inventory necessary to meet customer orders for the nine to 12 weeks it will take the supplier to produce and deliver new product.
In daily operations of enterprises that design, supply, manufacture and distribute medical devices, numerous lead time drivers are built into the business processes. Every business process is perfectly designed to get the results it achieves, and the process lead time is directly related to the process design—specifically, waiting for decisions, approvals, reviews and authorizations, as well as scheduling periods, batching processes, lot sizing, economic order sizes, quarantines and moving, staging and storing processes all are lead time drivers.
Improving Lead Time
Improvements in lead time can provide order-of-magnitude business and economic benefits. Eliminating just one day of lead time from the time the customer places an order until the time product is shipped could provide significant benefits to your company and your customer. You are able to replenish product to the customer in a quicker timeframe, resulting in lower inventory for your customer and more frequent orders. Also, removing a day of lead time from the customer credit authorization process reduces the internal processing costs, as well as improves revenue and responsiveness to customers. Taking the example one step farther, eliminating a week of lead time is worth a week of safety stock inventory.
Lead time improvements range in the 60%-90% improvement level. Customer orders that would be placed one week before they were due to be shipped are being placed before 2 pm and are shipping the same day. Customer orders placed after 2:00 pm are shipped the next day. In every process, the lead time unit of measure must be determined. Lead time can be measured in weeks, days, hours or minutes. Regardless of how it is measured, improvement is the objective.
Overall, lead time improvement generates benefits on three major competitive dimensions. When lead time improves, the total cost structure of the process is reduced, higher quality is achieved because the processes are fail safed to ensure the highest level of quality, and customer service increases, resulting in higher responsiveness to customers’ requests and shorter time spans for customers to be served.
Identifying the Opportunity
To identify the opportunities that exists for lead time improvement, first, listen to your customer and understand the customer’s requirements and what a reduction in the lead time the customer experiences with your company would provide for both the customer and your company. Second, walk the physical process flow of the major business and operational processes and identify the current lead times. Third, review your supplier lead times by supplier and purchase commodity. A reduction in the lead time equates to a reduction in the supplier’s inventory you carry because of the lead time for the supplier to replenish. Fourth, review and analyze your manufacturing and distribution operations lead times. The miniscule actual manufacturing time compared with the total lead time for the manufacturing process to occur is ripe with opportunity for major lead time reduction.
To further identify lead time opportunities, identify what one day of lead time improvement would generate in business benefits. These lead times would be in the following processes:
• Customer order to fulfillment
• Supplier order
• Invoice to payment
• Product development
• Month-end closing
• Production scheduling
• Warehouse order staging
Needless to say, lead time improvement is not acceptable if quality is jeopardized or errors and omissions increase.
Finally, many companies have embarked on value-stream mapping of their business processes as a tool to improve efficiency and process quality, eliminate costs and establish “lean” business practices. Value-stream mapping is a powerful analytical tool for process improvement, and when the analysis of the lead time of the process is included, breakthrough performance gains are achieved. Regardless of whether value-stream mapping, process flow analysis or process mapping is used to assess your business processes, lead time improvements are achieved when lead time analysis is included.
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Improving lead times in today’s competitive environment may not be optional to maintain competitiveness. Customers recognize the advantages of shorter lead times and are challenging providers to make improvements. The lead time to respond to the challenge already is becoming shorter.