Managing Lead Time
David P. Zimmerman
David P. Zimmerman, President, Zimmerman Consulting, Rochester, NY 14617, (716)266-4757, DPZim1@AOL.com
83rd Annual International Conference Proceedings - 1998
Abstract. Cycle Time Reduction is the goal of most companies today. Supplier Lead Times are the largest component of manufacturing Cycle Times length and drive Raw Material inventory levels. Lead Times exist for specific reasons and must meet specific criteria. This presentation defines reasons for, and criteria of, Lead Times. I then define what are , and what are not the drives of Lead Times. I will help you to determine when you can and cannot control Lead Time and why. Knowing the drivers provides you with a negotiating tool to use in managing Lead Time.
Introduction. Do we control Lead Time or does it control us? What is Lead Time? My purpose is to address these questions. The answers show us how to manage Lead Time. I will show how we developed our attitudes toward the use of time. I will then tie those attitudes into our business world to show that they affect how we deal with time.
Learning About Time. Can you identify with this? My parents calculated the start time for a doctors appointment as follows. The bus starts at the turnaround, 10 minutes to our stop and another half hour to the stop closest to the doctors. Working time backwards, they calculated that the 1:00 p.m. bus was the one to catch. Subtract from that, time to get dressed, then walk to the bus stop. The result, start the process at 12:30 p.m.. Later I learned that if dad needed a suit cleaned and pressed by a certain date, he took it to the dry cleaners one week earlier. For just about all our needs, short of groceries, we subtracted a Lead Time from need date (or time) to determine process start time. My parents mantra still rings in my ears "If you don't get started you'll never (fill in the blanks)". I was learning about Lead Time.
You and I learned about Cycle Times the same way. For example: it took me forty minutes to deliver my morning papers. It took my mother 2 hours to clean the downstairs. I took one hour to cut the lawn, and collecting from my customers took two and a half hours. Like Lead Times these time periods did not have a name. They just existed. We planned our lives around them. An extra large basket on my bike allowed me to improve delivery time because I did not need to stop and switch bags from my cart, or sled, to the handlebars. This innovation was a major breakthrough in my young life. We may have been victims when other people controlled the time, but the things we did, we could control. Even back then we intuitively knew that controlling these two time factors led to vast improvements in our lives.
Cycle Time vs. Lead Time. We have firmly established, in our psyche, that there are two different times. We know that these times can be influenced. One through money or negotiation, the other through our own efforts. One is controlled by others, the second by our own action (or inaction). Lead Times and Cycle Times are two separate entities. The terms are not synonymous. They are not interchangeable. To do so is the equivalent of using the terms price and cost interchangeably. They are driven by different factors, and used for different purposes.
Cycle Time is the amount of time it takes to move a unit through an entire process. Each process has its own Cycle Time. Manufacturing processes include, order receipt, procurement, manufacturing and shipment. There are Cycle Times for all processes from new product design through accounts receivable.
Virtually all manufacturing follows the same processes. Granted the length of time each step takes will vary with each product. From this we can see that, theoretically, in order to calculate a products full Cycle Time we add the manufacturing Cycle Time to the longest Lead Time component. I will demonstrate this shortly.
Lead Time is the amount of time, defined by the supplier, that elapses from the time a customer expresses a desire until that desire is satisfied. Its elements include; order receipt, order fill (by whatever means), and shipment. The supplier always defines the Lead Time, because the supplier determines how to fill an order.
The difference between Cycle Time and Lead Time. The following shows Cycle Time and Lead Time in the steps of a sample supply chain. In this chain there are four links. Like all supply chains, each link is both a customer and a supplier.
The raw material supplier gets raw material for their process. So that I do not sound like a cheer leader (raw, raw material), I will designate the starting material as core material. The Raw Material Supplier is a customer of the Core Material Supplier and simultaneously a supplier to the Sub Assembler.
Raw Material Supplier
Order Core Supplier Lead Manufacturing Lead Pack and
Material Time Time Ship
2 days 40 days 5 days 1 day
Cycle Time is the sum of all activities - 48 DaysLead Time is set by the Supplier. This raw material Supplier quotes 48 Days Lead Time
We can deal with this example. Its elements are normal (familiar). Cycle Time is the sum of the elements : Order Core Material + Supplier Lead Time + Manufacturing Lead Time + Pack and Ship = 48 Days. This supplier has quoted 48 days Lead Time to the Sub Assembler. Now we go on to the next step in the chain.
Sub Assembly Supplier
Order Raw Raw Material Build Lead Pack and
Material Lead Time Time Ship
2 days 48 days 5 days 1 day
Cycle Time is the sum of all activities - 56 DaysLead Time is set by the Supplier at 6 days Cycle Time is the sum of the elements: Order Raw Material + Supplier Lead Time + Manufacturing Lead Time + Pack and Ship = 56 Days. In this case the next link in the supply chain has been negotiating heavily with the Sub Assembly supplier. The goal has been a reduction in Lead Time. Due to the skill of the buyer, and the cooperation of the supplier, the Lead Time quoted by the Sub Assembly Supplier is 6 days. How? Again looking at our life experiences, where Lead Times are low many times it is because inventory exists. The Sub Assembler maintains inventories in order to quote the 6 days. The entire retail industry lives in this world. On to the next link, the final assembler.
Order Sub Assembly Build Lead Pack and
Subassemblies Supplier Lead Time Time Ship
2 days 6 days 5 days 1 day
Cycle Time is the sum of all activities - 14 Days
Lead Time is set by the Supplier at 20 days
Cycle Time is the sum of the elements: Order Sub Assemblies + Supplier Lead Time + Manufacturing Lead Time + Pack and Ship = 14 Days. Note first that the Cycle Time at this level is low due to the low Sub Assemblers Lead Time. The Cycle Time is a mere 14 days. However this final assembler wants to manage a business where an active backlog of orders exists. Further, management has decided that they will never miss a promised delivery. To help meet this goal the Final Assembler quotes a 20 day Lead Time. A built-in Lead Time cushion protects against the unforeseen.
The final Customer Lead Time is 20 days.
Each supplier, for their own reasons, sets their own Lead Time. That quoted Lead Time becomes an element in the next links Cycle Time. The quoted Lead Time may equal the Cycle Time, be less than the Cycle Time or be greater than the Cycle Time.
Lead Times and Cycle Times are two separate entities. The terms are not synonymous. They are not interchangeable. As the example supply chain shows, no one can determine the total Cycle Time of a multilevel supply chain. With that truth, we can now say that, which of the two metrics we see depends on where we are standing and which way we are looking in the supply chain. All a customer can ever see is Lead Time. A change in the longest supplier Lead Time results in a change in customer Cycle Time either up and down.
How do we use Lead Time. Lead Time is the amount of time, defined by a supplier, required to meet a request of demand. Lead Time is used to:
Create action messages in advance of a need in the planning system.
Define the completion date of an action.
Try this. You either had a wake up call or you set your alarm clock for this morning. Write down all the considerations, and times, that you used to determine the time you needed to wake. The result is a planning system that uses Lead Time. From that list pick an item of time. Now assume that the time doubled through no fault of yours. What do you do? Assume that the time is cut in half. What are the results? This mirrors what happens, in business, when Lead Times are changed at the time of need.
Lead Time Criteria and Effects. We have all been victims of Lead Time and carry with us, to some degree, the feeling of frustration when what we planned on does not happen. For the planning system to function properly, for our business to run effectively, the Lead Times must be accurate, adhered to, and changed only in advance of a need. So the first challenge in Lead Time Management is to assure Lead Times meet these criteria.
If my task is to insure Lead Times are accurate (can be repeated), adhered to and changed only in advance of need; then I don't have to worry about their length. Right? Lets look at that list you prepared earlier. Lets say that one of the considerations you used was shower time. Lets say further that the amount of time you recorded was 2 hours. It is accurate, by my definition (it can be repeated every time in 2 hours or less). What are the consequences of that Lead Time? Lack of sleep? The need to get to bed earlier? Wasted time when it doesn't take 2 hours? The lesson -- longer than necessary Lead Times cause waste.
In business, longer than necessary Lead Times cause, among other things, increased transactional activity for the buyer and seller. As an example:
Lead Buy Policy Open Transactional
Time (Stocking Strategy) Orders Time Activity
150 30 Days 5 5
60 30 Days 2 2
30 30 Days 1 1
Long Lead Times result in increased inventories. Planners and buyers create inventory as a hedge against forecast change over quoted Lead Time. A couple of events take place over the Lead Time.
* Schedule decreases magnify the amount of inventory as measured in days of supply. When the coverage is perceived as too great, the incoming valve is turned off. Buyers try to reduce inventory amounts quickly.
*We know that inventory has legs. Just like the clams in the BC comic strip, inventory seems to get up and walk away. Most often it comes back. Sometimes it does not. In the meantime the effect is order changes to the supplier.
Any manufacturing unit has a finite ability to increase or decrease production levels in the short term. Available capital resources and the amount of human resources set the limit of change. Yet all of us have seen schedule changes come across our desks that are several x (times) up or down. If the manufacturing unit cannot change to that degree due to capital constraints, the culprit must be the amount of inventory lost, found or built up in anticipation of a future need. Remember the chain of events -- the longer the Lead Time the greater the inventory -- The greater the inventory the greater the magnitude of schedule changes.
Capacity Vs Lead Time. My next task in Lead Time management is to assure that the Lead Times quoted to me are not too long. To do that, I must determine what drives Lead Time. I now know it's not Cycle Time. What does drive Lead Time?
Each of us has felt a plan go awry due to capacity problems. If you drop a 2 hour job on my desk, you will get it when I get to it. That is, my backlog defines my finish time. Our experiences leads us to the conclusion that capacity drives Lead Time. But wait just a minute. Why do we have Lead Times in the first place? To tell us when to take an action so the desired result will occur when needed. When Lead Time is changed at the time an order is placed, that need is violated. In our personal lives, the Lead Times we use, are by their nature, short term. The degree of delay is relatively short and the delay is short lived.
In business, inventory is involved. A seller or supplier must keep capacity in mind when setting their Lead Time, not determine Lead Time when the call comes in with an order. For illustration I will tell a story. The basics are typical and familiar to you. It is based on fact, although the names are changed to protect the guilty.
A supplier produced the world famous widgets. The Lead Time quoted was sixteen weeks. The supplier liked to keep a twelve week back log of open orders (this covered raw material acquisition), took one week for order entry, two weeks to manufacture and one week transit time. This supplier, like many, knew that Lead Time equals demand (including backlog) divided by capacity (throughput).
In this case, the result of the math was a twelve week Lead Time (sixteen quoted). Well, as life would have it, demand started to creep up. The math started to creep up until the calculated Lead Time was eighteen weeks. Deliveries were missed. The supplier reacted by increasing his quoted Lead Time to twenty weeks. Why? To catch up! If I increase Lead Time, the delta between the old Lead Time and new is the amount of time with no incoming orders. It is the time used to reduce backlog. It is a normal human reaction. When we see backlog increase, we increase Lead Time (so that we can catch up,). It takes the immediate pressure off.
The worse thing that can happen to a buyer or planner is to shut down a production line. When the supplier increased the Lead Time to twenty weeks the buyers demand did not go away. The buyer had to scramble to somehow keep the line fed. The Buyer protects themselves by placing an order that insures that, if this was to happen again, they are protected. Buyers protect themselves, in extreme cases, by reserving capacity at suppliers. Anyhow what did happen at the widget manufacturer?
The supplier saw the increased demand (normal + increased need + hedge), did his calculation and low and behold; Lead Time had to be increased again. The same phenomenon happened again. Lead Times increased from 16 weeks to 20 to 26 to 36 to 52 weeks. A post office opened just to handle the volume of orders and changes. This is called the Lead Time Spiral. In this story, one day the owner of the widget company said enough. "I declare that starting Monday the Lead Times will be sixteen weeks and I'm starting another shift." What happened? Several late deliveries, but more importantly for our discussion; most of the increased demand dried up. When the Lead Time was reduced, demand disappeared. Sure, some hedging went on, but the vast amount of increased demand simply disappeared. In the '70's, companies went out of business because of the Lead Time Spiral. And, when the demand went away, the supply exceeded demand so the current price/profit ratio could not be supported.
What's a body to do when demand increases above capacity? The answer is one that you have used time and again. Allocation of capacity until manufacturing capacity can be increased to meet demand. This gives the buyer a known supply and the seller a truer picture of the demand. Increasing Lead Time hurts both buyer and seller.
Buyer Defined Lead Times. Since Cycle Time and Capacity are not Lead Time drivers some other factors must be the drivers. As buyers, we to often tell a supplier the Lead Time we want them to quote by the way we phrase the request for quotation. How do we tell suppliers what Lead Time to quote us? When I tell a supplier I want infinite flexibility (I can order 10 to 10 million) I am telling the supplier to quote a worst case Lead Time. The end result is a long Lead Time that the supplier , and buyer, can feel comfortable will always be met. At the other extreme, I may instruct the supplier to hold inventory dedicated to us. In that case, the quoted Lead Time will be very short. Whether at one extreme or the other, or somewhere in-between, as a customer, the way I ask for Lead Times, many times, contributes to the length of the Lead Time I am quoted.
Lead Time Drivers. If it is true, that I can control a quoted Lead Time, then what defines Lead Time is a combination of factors driven by both seller and buyer. Going back to our life experiences we have seen, maybe even taken advantage of, one or more of the factors that drive Lead Time. Each supplier looks at you, me, and our needs, and theirs, to determine what service level we will get. What our Lead Time will be. The business practices of the supplying organization determine the quoted Lead Time. A generality to cover this concept is that "Lead Time is to Cycle Time as Price is to Cost". The factors that drive what the customer gets are the same in both cases. Those factors fall into the general category of business practices consisting of, Manufacturing Strategies, Competitive Advantage, and position of purchased item in its Product Life Cycle.
Manufacturing Strategies. Based on forecasted demand, pricing pressures, vagaries of manufacturing, the nature of the business or process, a manufacturer will manufacture following one of the following strategies (in descending order of the Lead Time they drive): Engineer to Order, Make to order, Assemble to Order, or Make to Stock.
Competitive advantage Suppliers analyze their competitive advantage to determine the Lead Time they will quote. Potential Competitive advantages are: Price, Quality, Deliverability, Flexibility, Product Design, Service, Image and Technology. Notice that Lead Time is implied in only one. It is the buyers job to understand what their suppliers believe their competitive advantage to be.
Product Life Cycle. The last component in determining a Lead Times validity is the determination of where that specific item is in its life cycle. Each product has a life cycle, Introduction, Growth, Maturity and Decline. Lead Times vary from long to short to long again throughout a products life cycle.
Summary. Managing Lead Times means that we understand the business practices of the suppliers. We must test their Manufacturing Strategy and the items place in its Product Life Cycle against their quoted Lead Time to determine if that Lead Time is supportable. We then test their view of their competitive advantage(s) to determine its effect. Without this knowledge Lead Time management cannot be successful.
* Lead Time is to Cycle Time as Price is to Cost. Do not mix the terms.
* What is Lead Time? The amount of time, specified by the supplier, required to meet a customer need.
* How is Lead Time Managed? Know the factors that define Lead Time (competitive advantage, manufacturing strategy and product life cycle). Manage the Lead Time you need by determining what factor(s) define your Lead Time then address those factors. Show the supplier that is in their self interest to meet your Lead Time needs. Use your knowledge of the driving factors to negotiate with suppliers.
* What should never happen? Capacity constraints should never affect quoted Lead Time.