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KNOWLEDGE LIBRARY

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27Jun

Warehouse Occupancy Percentage

Optimal storage utilization helps enforce healthy inventory management. In our early work with Honda their...

02Jun

Efficient Procurement Inventory

Efficient procurement inventory (EPI) is often required to realize steep discounts when a special opportunity...

02Jun

Inventory Carrying Rate

The inventory carrying rate (ICR) is the percent of the unit inventory value used to...

26Jun

Inventory Activity Profiling & Data Mining

Suppose you were sick and went to the doctor for a diagnosis and prescription.  When...

27Jun

Inventory Performance Measures

Inventory performance measures include financial, productivity , quality, and response time indicators for evaluating the efficiency and...

Leadtime Reduction

There is a near maniacal emphasis on leadtime reduction in many organizations. A few years ago we completed a supply chain benchmarking project with a large company in the computing industry. I met a group of engineers there unlike any I have ever met; the velocity engineering group. I asked what they did. They explained that their entire purpose was to reduce cycle times in all the processes in the company. They all spoke like auctioneers and lived in their own secretive sub-culture; kind of like a secret society of cycle time ninjas. They are not the kind of people I want to hang out with, but they were very effective at taking time out of processes.

Another client recently called and asked how they could reduce their cycle time in aircraft engine repair. I asked them how long it currently takes them. They said it required seven days – including the roundtrip to Europe. Given how short the cycle time already was, I was stunned that they were even asking. They insisted I consider the question. I asked them what the cycle time was before it had been reduced to seven days. They said it had been 21 days. I asked them how they condensed the cycle time to seven days. They said they value stream mapped the process into daily buckets and found opportunities to work activities in parallel and to eliminate wasted time. I encouraged them to repeat the process, but to use hourly buckets and to look specifically at which days in the week and hours in a day each activity would be performed. They took my suggestion and are now working the international process in 4.5 days.

Leadtime often plays a dominant role in the inventory required to support a supply chain strategy. It contributes directly to pipeline and safety stock inventory.

In safety stock inventory, leadtime has a multiplicative effect. My friend at Honda, Chuck Hamilton, uses a golf analogy to explain the effect.  If a golfer hits a ball 100 yards off the tee with the face off center by 10%, the ball is only 10 yards off center at the end of its flight, and still in the fairway. If a golfer hits a ball 200 yards off the tee with the face off center by 10%, the ball is 20 yards off center at the end of its flight, and barely in the fairway. If a golfer hits a ball 300 yards off the tee with the face off center by 10%, the ball is off center by 30 yards at the end of its flight, in the rough, probably the deep rough. The longer the leadtime, the greater the impact of forecast errors.

In a recent project with a large food company we found that every day of leadtime reduction was worth approximately $5 million

  1. Inventory Investment vs. Days of Leadtime

Given these results, the logical assumption is that shorter leadtimes are better. At the risk of being heretical, I would say that the right leadtime is better.  Many customers do not value speed but prefer leadtime consistency. Many customers, suppliers, and internal systems are not equipped to accommodate reduced leadtimes. Also, leadtime reductions have a price tag. Some leadtimes are shortened by moving product more frequently by more expensive transportation modes (e.g. air vs. ocean, truck vs. rail, etc.). Some leadtimes are reduced by purchasing from local suppliers at a higher price. Some leadtimes are reduced via forward stocking nearer the point of consumption, requiring extra inventory. Some leadtimes are reduced by investing in material handling automation to speed product through warehouses, distribution centers, ports, and factories. Those investments must be weighed against the benefits associated with the leadtime reductions they bring.

Determining the appropriate investment in leadtime reduction is the purpose of RightTimes™ optimization and simulation. An example RightTimes™ simulation for a single SKU for a large toy company is presented in Figure 2. In the example a variety of leadtime reduction options were under consideration including alternate transportation modes, alternate transportation schedules, near-sourcing, and receiving automation. Those options had the potential to reduce leadtime from the baseline of 72 days to 40 days. What is the ripple effect? (Figure 3) How much could be justifiably invested in the options?

  1. RightTimes™ Leadtime Simulation for a Large Toy Company

First, notice that safety stock inventory value drops from $60,330 to $33,683; a reduction of $26,947 or 44%. Pipeline inventory investment drops from $24,650 to $13,699; a reduction of $10,951 or 44%. Total inventory investment drops from $92,679 to $54,773; a reduction of $37,906 or 41%. Inventory carrying cost drops from $42,632 to $25,196; a reduction of $17,437 per year. Inventory turns increase from 1.24 to 2.10; a 69% increase. GMROI increases from 144% to 244%. Inventory value added increases from $90,768 to $108,204; a $17,437 increase or 19%. Inventory policy cost drops from $49,112 to $31,676; a reduction of $17,437 or 36%.

  1. RightTimes™ Simulation Results for a Large Toy Company

Is a 41% reduction in inventory investment; a 69% increase in inventory turns; a 100% increase in GMROI; a 19% increase in inventory value added; and a 36% reduction in inventory policy cost worth the investment? In this case those percentages applied to the entire SKU base, yielded a $20,000,000 reduction in inventory; $8,000,000 per year reduction in inventory carrying costs; turns increasing from 1.2 to 2.0; an increase in GMROI from 150% to 250%; and an increase in inventory value added of over $17,000,000. The investments in alternate transportation modes and routes, near-sourcing, and automated logistics and material handling systems required to accomplish the leadtime reduction totaled approximately $4,500,000; yielding a payback against inventory carrying cost savings of 0.56 years.

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