CHAPTER 6 Strategic Lead-Time Management MANAJEMEN OPERASI, JMFBE UBAYA Learning Objective: Time based competition Lead time concept Logistic pipeline management Introduction ‘Time is money’ is perhaps an over-worked cliché in common parlance, but in logistics management it goes to the heart of the matter. Not only does time represent cost to the logistics manager but extended lead times also imply a customer service penalty. As far as cost is concerned there is a direct relationship between the length of the logistics pipeline and the inventory that is locked up in it; every day that the product is in the pipeline it incurs an inventory holding cost. Secondly, long lead times mean a slower response to customer requirements, and, given the increased importance of delivery speed in today’s internationally competitive environment, this combination of high costs and lack of responsiveness provides a recipe for decline and decay. Time-based competition Customers in all markets, industrial or consumer, are increasingly time sensitive There are many pressures leading to the growth of time-sensitive markets, but perhaps the most significant are: Shortening life cycles Customers’ drive for reduced inventories Volatile markets making reliance on forecasts dangerous 1. Shortening life cycles Figure 6.1 The product life cycle Saturation Maturity Growth Introduction Time A feature of the last few decades has been the shortening of these life cycles. Take as an example the case of the typewriter. The early mechanical typewriter had a life cycle of about 30 years – meaning that an individual model would be little Decline Figure 6.2 Shorter life cycles 1. Shortening life cycles • Less time to make profit • Higher risk of obsolescence • Timeliness of delivery – meaning delivery of the complete order at the time required by the customer – becomes the number one orderwinning criterion. make timing crucial Market Late entrant Obsolete stock Time 2. Customers’ drive for reduced inventories • • Not only can customers be serviced more rapidly but the degree of flexibility offered can be greater and yet the cost should be less because the pipeline is shorter. Figure 6.3 suggests that agility can enable companies to break free of the classic trade-off between service and cost. Instead of having to choose between either higher service levels or lower costs it is possible to have the best of both worlds. Figure 6.3 Breaking free of the classic service/cost trade-off Time compression Service enhancement Cost reduction 3. Volatile markets make reliance on forecasts dangerous The conventional response to such a problem has been to increase the safety stock to provide protection against such forecast errors. However, it is surely preferable to reduce lead times in order to reduce forecast error and hence reduce the need for inventory. One of the basic fallacies of management is that long lead times provide security and cover against uncertainty. In fact the reverse is true! Imagine a utopian situation where a company had reduced its procurement, manufacturing and delivery lead time to zero. In other words, as soon as a customer ordered an item – any item – that product was made and delivered instantaneously. In such a situation there would be no need for a forecast and no need for inventory and at the same time a greater variety could be offered to the customer. Whilst clearly zero lead times are hardly likely to exist in the real world, the target for any organisation should be to reduce lead times, at every stage in the logistics pipeline, to as close to zero as possible. In so many cases it is possible to find considerable opportunity for total lead-time reduction, often through some very simple changes in procedure. Lead-time concepts From the customer’s viewpoint there is only one lead time: the elapsed time from order to delivery. Clearly this is a crucial competitive variable as more and more markets become increasingly time competitive. Nevertheless it represents only a partial view of lead time. Just as important, from the supplier’s perspective, is the time it takes to convert an order into cash and, indeed, the total time that working capital is committed from when materials are first procured through to when the customer’s payment is received These lead-time concepts 1. The order-to-delivery cycle 2. The cash-to-cash cycle 1. The order-to-delivery cycle In today’s just-in-time environment short lead times are a major source of competitive advantage. Equally important, however, is the reliability or consistency of that lead time. It can actually be argued that reliability of delivery is more important than the length of the order cycle – at least up to a point – because the impact of a failure to deliver on time is more severe than the need to order further in advance. However, because, as we have seen, long lead times require longer-term forecasts, then the pressure from the customer will continue to be for deliveries to be made in ever shorter time-frames 1. The order-to-delivery cycle What are the components of order cycle time? Figure 6.4 highlights the major elements. Customer places order Order entry Order processing Order Transport Order received assembly Each of these steps in the chain will consume time. Because of bottlenecks, inefficient processes and fluctuations in the volume of orders handled there will often be considerable variation in the time taken for these activities to be completed. 2. The cashto-cash cycle Cumulative lead time Figure 6.7 illustrates the way in which cumulative lead time builds up from procurement through to payment. It is also the case that longer pipelines obscure the ‘visibility’ of end demand so that it is difficult to link manufacturing and procurement decisions to marketplace requirements. Thus we find an inevitable build-up of inventory as a buffer at each step along the supply chain. An approximate rule of thumb suggests that the amount of safety stock in a pipeline varies with the square root of the pipeline length. The longer the pipeline from source of materials to the final user the less responsive to changes in demand the system will be. [procurement to payment] Raw material stock Subassembly production Intermediate stock Product assembly Finished stock at central warehouse In-transit Regional distribution centre stock Customer order cycle (order-cash) Logistic pipeline management The goals of logistics pipeline management are: Lower costs Higher quality More flexibility Faster response times value-adding time is time spent doing something that creates a benefit for which the customer is prepared to pay. Thus we could classify manufacturing as a value-added activity as well as the physical movement of the product and the means of creating the exchange. On the other hand, non-value-adding time is time spent on an activity whose elimination would lead to no reduction of benefit to the customer. Some non-valueadding activities are necessary because of the current design of our processes but they still represent a cost and should be minimised. The difference between value-adding time and non-valueadding time is crucial to an understanding of how logistics processes can be improved. Figure 6.12 Reducing non-value-adding time improves service and reduces cost • To achieve improvement in the logistics process requires a focus upon the lead time as a whole, rather than the individual components of that lead time. In particular the interfaces between the components must be examined in detail. These interfaces provide fertile ground for logistics process reengineering. Customer delivery In-transit Regional Raw material Finished stock stock stock Production Production In-transit Customer delivery Raw material Finished Regional stock stock stock Reducing logistics lead time • Figure 6.13 depicts such a map for the manufacture and distribution of men’s underwear. • A 60-day total process time would result in 60 days’ inventory. However, in the case highlighted here there are actually 175 days of inventory in the pipeline. Clearly, unless the individual processes are highly time variable or unless demand is very volatile, there is more inventory than can be justified. • TIn many cases much of the non-valueadding time in a supply chain is there because it is self-inflicted through the ‘rules’ that are imposed or that have been inherited. Such rules include: economic batch quantities, economic order quantities, minimum order sizes, fixed inventory review periods, production planning cycles and forecasting review periods. • The basic principle to be noted is that every hour of time in the pipeline is directly reflected in the quantity of inventory in the pipeline and thus the time it takes to respond to marketplace requirements The impact of low-cost competition For many years cashmere-based products had tended to be highly priced and as a result bought only by a more affluent customer. However, with the increasing globalisation of markets, partly influenced by the reduction or removal of trade barriers, new sources of low-cost competition began to emerge as the twentieth century moved to a close. A shift of focus At the same time there was a transition from a business producing mainly standard products on a repetitive basis to a much more customised product base, often made as own-labels for major fashion houses such as Hermes. As a result, design became a much more critical element in the product development process. It was also recognised that becoming a design-led company could provide a powerful platform for competing against low-cost country sources. However, it was not sufficient to be innovative in design if new products could not be introduced rapidly and production adjusted quickly to match uncertain demand. Bottleneck management All the logistics processes can be viewed as a network of interlinked activities that can only be optimised as a whole by focusing on total throughput time. The essence of OPT (optimised production technology) is that all activities in a logistics chain can be categorised as either ‘bottlenecks’ or ‘non-bottlenecks’. A bottleneck is the slowest activity in a chain and whilst it may often be a machine, it could also be a part of the information flow such as order processing. The throughput time of the entire system is determined by bottleneck activities. It follows therefore that to speed up total system throughput time it is important to focus on the bottlenecks, to add capacity where possible and to reduce set-ups and set-up times if applicable. Bottleneck management Equally important, however, is the realisation that non- bottlenecks should not be treated in the same way. It is unnecessary to improve throughput at non-bottlenecks as this will only lead to the build-up of unwanted inventory at the bottleneck. The aim is to manage the bottlenecks for throughput efficiency, which implies larger batch quantities and fewer set-ups at those crucial points, whereas non-bottlenecks should minimise batch quantities even though more set-ups will be involved. This has the effect of speeding up the flow of work-in-progress and these ‘transfer batches’ merge into larger ‘process batches’ at the bottlenecks, enabling a faster flow through the bottleneck. It follows that idle time at a non-bottleneck need not be a concern, indeed it should be welcomed if the effect is to reduce the amount of work-in-progress waiting at a bottleneck.
