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).

©2002 Coplenish Consulting Group.

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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%*
• 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 Coplenish Consulting Group 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.

©2002 Coplenish Consulting Group.

Confidential and Proprietary.
Prior permission required Page 2
to reproduce or distribute.