Customer Lead Time
You know that lead time is how long your customer has to wait until they get their product. In today’s market, your customer does not want to wait very long. With few exceptions, consumers only buy what is in stock. When you choose how much stock to own, you balance how fast you can sell with how long it takes to resupply.
Resupply Lead Time
Resupply orders also come with a lead time. The lead time to make products is much longer than the lead time to ship an item that is already in stock. This is also true for the finished product if you make them to order. Think about resupply lead time as how long it takes to make the first item. From that point forward, we need to make products faster than you sell them. Every industry is different, but lead times in all markets are getting shorter.
Component Lead Time
Let us go another layer deeper. Many common parts go into a finished product. Components also have a lead time. Depending on the type of part, we use different strategies. For common parts that we use often, we stock enough to keep from running out. We encourage our suppliers to stock parts that are standard to the industry. Many suppliers do not allow returns because of the risk of counterfeit parts. If they hold the stock, they can sell them to someone else if we do not end up needing them. For custom parts, we try to find suppliers that focus on short lead times with reasonable batch sizes.
Lead Time Drives Inventory
The stock level that you need for finished products is easy to calculate. You need as many items that you sell per day times the number of days that you have to wait for resupply. It does not make sense to sell less, so you reduce stock by shortening the resupply lead time. You need more inventory if your sales are hard to predict. You also need more inventory if your products are seasonal. In that case, you sell items faster than we can make them for a part of the year.
Inventory Costs Money
You pay for stock when you get it, but you do not get paid until you sell it. The longer you hold stock, the more money you have tied up. Besides interest, inventory costs money in other ways. Think about building space and racks to store it. If you cannot sell it, you have to throw it away. You move stale stock around to make room for other products. Imagine how much farther you have to travel in a big warehouse. You might have to delay a product upgrade and fall behind your market or pay to have it changed. When you decide which items to stock, aim for parts that you use in more than one configuration or kit. If you sell the item in more than one way, you reduce your risk of tossing it out.
Once you decide to let us shorten your resupply lead time, we begin with Little’s Law:
Lead Time = WIP / Throughput
Lead Time is the total time from start to finish.
WIP (Work in Progress) is the number of items started, but not finished.
Throughput is the number of items we finish per day.
We shorten your lead time by increasing throughput, decreasing WIP, or both.
This is a good place to start because it does not cost much. Our lead time drops when we finish a job before we start another one. We limit how many total jobs we work on at any given time. It is tempting to stop work on a job so that we can quick build a hot job. Remember that every job but the hot one is waiting and raises your lead time. Instead, we build smaller batches to decrease WIP. Think about what happens when we go to start a small job and our machine is busy with a big job. You wait less if we build half of the big job and then slip in the small one. We build the other half of the big job when you actually need it.
The other way to shorten lead time is to grab a bigger shovel. Process more items in a day and we burn through your backlog quicker. We increase throughput by adding equipment or people. We also get more done if we cut down on mistakes and only build what you need right now. Sometimes we only need more throughput for a short time when you have a spike in orders. We save overtime for these moments and use less busy times to get a little ahead of your schedule. When working to get ahead, we do not speculate. We build orders that you actually need a little bit early.
Large batches increase lead time. When we process a large order, we tie up the schedule for all of the other products that you need. We price based on total yearly volume and encourage you to place orders as you need them. This helps us build the orders that catch you by surprise in the shortest time possible.
When we used on-time delivery as a key measure we often quoted long lead times and rescheduled late orders. We made the measure look good, but experienced long lead times. We prefer to focus on lead time. The end goal is the same, but we get both on-time delivery and a shorter lead time. Our key measure is the total of component lead time, inventory time, and build time. By looking at the whole picture we reduce waste, launch new products quickly, and react to surprise orders.
Want to Know More?
Just ask us how we do it. We are glad to help. We use a manufacturing strategy called Quick Response Manufacturing (QRM). Rajan Suri covers this topic thoroughly in his book titled “It’s About Time”.