Lead time has a significant impact on inventory level. Thus, reducing lead time should be top of mind for a manufacturer looking to better control its parts inventory. Long lead times tie up cash in huge inventories. This is cash that could be better used elsewhere in the business such as generating more sales or improving competitiveness.

Consider this – say you have the ability to process your customer’s order immediately and simultaneously send an order instantly to your supplier located next door to your facility. Suppose that your supplier can deliver your full order to your point-of-use (POU), unpacked and ready to be consumed within 30 minutes of the time you place your order.

This would allow you to significantly reduce or even eliminate your inventory completely. This also means that you wouldn’t have to rely too much on forecast accuracy. If demand is much more than forecast you will still be capable of fulfilling the orders, given that your supplier can deliver the products in 30 minutes from the time of your order. If the business is far worse than forecasted then the cash will be even more important and won’t be sitting on more than about 30 minutes worth of inventory!

By contrast, now suppose your company is incredibly disorganized and takes 8 weeks to process an order. Suppose that your supplier is also inefficient, requiring 8 weeks to produce the items in your order. Let’s say the supplier is in another country and transportation and delivery of the products take an additional 24 weeks to reach your dock. Your overall lead time is now 40 weeks or roughly 10 months. Thus, you would now be required to carry a minimum of 10 months or almost an entire year of inventory.

That’s not all. Because forecasting 10 months out is far more prone to variation and inaccuracy than forecasting 30 minutes out, you will also need to carry significantly more safety stock as a buffer against that greater degree of uncertainty. This is the cost multiplier effect of lead time.

As an aside, notice that we didn’t even account for any additional time required to inspect, unpackage and deliver your products to their stocking location(s)!

To reduce lead time, you can compartmentalize lead time into the following buckets:

  • Review Time – This is the time from when you receive a customer’s order and send an order to a supplier. If it takes you weeks to review an order, then you would want to understand why the review takes so long to complete. Huge cost reductions are possible by streamlining your allotted review time.
  • Manufacturing Time – This is the duration needed for the supplier to ship the products to you from the time they receive your order. Keep in mind that this not only includes the manufacturing duration but also the review time for the vendor. Since manufacturing is not in your control, it’s harder to shorten manufacturing time but it is possible. Maybe try to offer your vendor an incentive if they can deliver before their scheduled timeframe.
  • Delivery Time – This can be lessened by indicating your preferred mode of shipment. This is something you can consider if the savings associated with inventory costs override the higher expenses for faster shipping.

Finding ways to reduce lead time requires resourcefulness and significant analysis but the outcome is well worthwhile in terms of reduced costs, improved competitiveness, and improved profitability.

Falcon helps manufactures overcome their inventory challenges. Contact us to discover how.