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Inventory and lead time
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Inventory and lead time

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  • A good understanding of lead time and its components as described above is important because it enables companies to reduce inventory, improve customer service, enable improved back-to-back ordering, improve the forecast error factor, reduce safety stocks, and increase reliability. One of the most important factors to realise in lead time analysis is the variation at each stage. Invariably one is talking about lead times in plus/minus terms.
  • In mapping lead times within the supply chain it is interesting to note the amount of time spent the production processes and that spent effectively in storage and the effect both components have on the total cumulative lead time, and the opportunities it provides for savings
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    • 1. Lead Time- Getting it RightPresented byStuart Emmettwww.learnandchange.comAnd inspired by the book “Excellence in Inventory Management”by Emmett & Granville (2007)
    • 2. Time is THE resource1. “Once it has gone, it has gone, it will never to come back”2. “What separates good and poor managers is how they manage time”3. “Time is a budget item”4. “Unless suppliers get their act together on lead times, then simply, we will change supplier”5. “Who should pay, for unreliable lead times?”
    • 3. SUPPLY MATERIALS/ GOODS FLOW DEMAND PURCHASE PRODUCTION LOGISTICS MARKETING “SOURCE” “MAKE” “DELIVER” “SELL” INFORMATION & MONEY FLOWS RAW WORK IN FINISHEDMATERIALS PROGRESS GOODSSUPPLIERS ULTIMATE RECYCLING/RETURNS FLOW SUPPLIER CONSUMER
    • 4. The Supply chain Definition: •“Everything from demand to supply and back to demand” •Process that integrates/coordinates/controls •Movement of materials/inventory/information •Suppliers>Company>Customers •In a Timely manner
    • 5. Supply chains - key aspects•Cost or Service?•Supply chain or demand pipeline?•Many parts/players/participants involved•More than one type of supply chain in any company•30 to 70% business cost is in the Supply chainKey: Supply Chain is about Movement, therefore, we mustManage the flows
    • 6. Supply Chain FlowsMaterials Flows:Materials Flows: Money Flows Money Flows••Sourcing/buying Sourcing/buying ••Assets Assets••Transport/logistics Transport/logistics ••Holdingcosts Holding costs••Receiving/warehousing Receiving/warehousing ••Carryingcosts Carrying costs••Stockholding Stock holding ••Debtors Debtors ••Creditors Creditors Information Flows ••Exchangerates Exchange ratesInformation Flows••Supplycycle; e.g. forecasts, PO’s Supply cycle; e.g. forecasts, PO’s Keys: All of the flows are: Keys: All of the flows are:••Demandcycle; e.g. replenishment Demand cycle; e.g. replenishment ••connected connected ••affected by Time affected by Time
    • 7. Supply Lead Time: A StarterWhat would we find out, if:•“Pin yourself to an order” (Information flows)•“Pin yourself to the goods” (Material flows)•“Pin yourself to a dollar bill” (Money flows)
    • 8. Supply Chain = joined up processesA Process (like the Supply Chain) is“A sequence of dependant events, involving time, that has avalued result for the eventual end user”.Three key features of processes•Dependency•Variability•Interfaces
    • 9. Any process has 3 versionsWhat You Think it is What you would Like What it Actually is it to be
    • 10. 8 Supply Chain rulesNumber 1: “Win the home games first”Number 2: Inventory is the common concernNumber 3: CollaborationNumber 4: Fixed reliable lead timesNumber 5: What do Customers valueNumber 6: Smooth continuous flowsNumber 7: Trade off holisticallyNumber 8: Use appropriate ICTSource: The Supply Chain in 90 minutesEmmett 2005
    • 11. InventoryInventory Management is:“An approach to manage the product flow in a supply chain,toachieve the required service level at an acceptable cost”
    • 12. Inventory Key Aspects•Determining the products to stock and the location where theyare held•Maintaining the level of stock needed to satisfy the demand (byforecasting of demand)•Maintaining the supply•Determining when to order (the timing )•Determining how much to order (the quantity)
    • 13. Inventory Key Components•No 1 Demand Analysis/Forecasting•No 2 Supply Lead Time•No 3 Cost & Benefits
    • 14. When To Order/Replenishment“When stocks at a level,that are able to satisfy demand,until the replenishment order is available”Four basic questions:•How much demand is expected?•What cost/service level balance is required?•Which replenishment method to use?•How long will the supply replenishment take?
    • 15. When To Order •Supply LT •Demand use during the supply LT •Any Supply LT Variability, (usually poorly dealt with, it must be measured and must be minimised) •Any Demand variability, (the difference between the Average demand and the actual demand, over time and is measured by the standard deviation) •Required Service Level, (the availability of stock to service requirements) •Free stock
    • 16. Inventory problems“Frequently, when inventory problems exist, people believe it isbecause forecasts are inaccurate.In our experience, it is more likely to be the result of lead timesbeing wrongly or inaccurately defined.Consequently analysing lead times can be fertile improvementterritory”Source: “Excellence in Inventory Management”Emmett & Granville 2007
    • 17. Supply Lead TimeIs the elapsed time from:• When deciding to place an order for a product• to when the ordered item becomes available to satisfy customer demands.
    • 18. One Supply Chain: Total Supply Lead TimePROCUREMENT TO STOCK Yarn Fabric Garment Manufacturer Manufacturer Manufacturer 30 + 20 10 + 2 35 + 20 5 + 2 20 + 20 DELIVERY TO CUSTOMER Retailer Warehouse = 175 + 20 + 13 15 + 20 2 + 2 33 + 5 5 + 2 106?
    • 19. 175 Retail Store 120 10 Distribution Centre 15 95 20 FG Garments Warehouse 5 Bulk FG 5 Cut Work WIP 10 Fabric RM 5 FG Fabrics 55 Grey 15 Fabric WIP MANUFACTURER 5 Yarn RM GARMENT PRODUCTIONCumulative 30Inventory 10 Yarn FG FABRIC RETAILER YARN 20 Fibre 10 15 20 10 Process Lead Time 55
    • 20. Supply Lead TimeInvolves all of the following:•The materials movement times•The information flow times•The storage and static times•And for some: the payment and credit times•Many individual items involved.e.g.: -production preparation ,processing -in stock time
    • 21. Supplier lead timeIs only one part of total supply lead timeSupplier Lead time is:•Time order is received•Time order is dispatched•Time order is received
    • 22. Impact of order processingTime decide needTime place orderTime order receivedTime product despatched Supplier LTTime product received
    • 23. Impact of receipt operationsTime order receivedTime product despatched Supplier LTTime product receivedTime available for issue
    • 24. Total Supply lead timeTime decide needTime place orderTime order received Supplier LT Supply LTTime product despatchedTime product receivedTime available for issueTime payment is available to supplier
    • 25. Supply lead timesInternalTime decide needTime place orderExternalTime order receivedTime product despatched Supplier LT Supply LTTime product receivedInternalTime available for issueTime payment is available to supplier
    • 26. Supply lead time (SLT) and riskKey: Must understand how the overall SLT has been derived.Too often only the external supplier lead time is consideredKey: Supplier lead time must be challengedToo often customers take the supplier lead time provided bysuppliers as given
    • 27. Lead Time•Lead times are critical•Lead times must be measured•Lead times must be controlledFor example:If use 70 items per week,and supply LT is 2 weeksThen,maximum stock is 140 itemsBut if supply LT is variable by +/- one weekThen,maximum stock is 210 items minimum stock is 70 itemsWe may “play it safe” and hold 210 items
    • 28. Lead time and customersLead time provided to our customers, does not impact ourinventory levels.It is only the supply lead time that impacts inventory.Clearly, the lead time to our customer, impacts their inventorylevel. They will be keen to ensure it is both minimised and isreliable; just as we should be with our suppliers.
    • 29. Case Study 1•300,000 SKU’s ; with demanding inventory availabilitytargets•Supply lead times were both long and unreliable.•Project to work with suppliers to improve the situation.•One supplier was asked: is it possible to reduce yourcurrent 20 week lead time?
    • 30. Case Study 1•Supplier said sure, what would you like it to be?•We suggested 18 weeks and immediate yes•Surprised by quick response, so we asked, what they couldprovide?•The supplier said 2 weeks.
    • 31. Case Study 1•So why was 20 weeks used when 2 weeks could beachieved?•Discovered initially, the customer’s buyer had dealt with thesupplier’s sales manager.•For the supplier this was a new account and a significantone. Hence the initial order was larger than they couldsupply from stock.
    • 32. Case Study 1•A lead time of 20 weeks had therefore been quoted to allowsufficient time.•No one had then thought to ask what the lead time wouldsubsequently be for the replenishment orders from stock.• If they had asked they would have been told 2 weeks.
    • 33. Case Study 2 •Remotely located gas production facility in Middle East. •Purchasing in local market and globally. •Rising stock values, yet the demand was flat. •We called in to investigate: asked what problems do you have with supply lead times? •Answer was none (?), so we asked why? •Answer was when placing orders used supplier LT for local market @ 3 months and global market @ 6 months. •Reality was, never as long as this
    • 34. Case Studies 1and2: Conclusion•No control of lead time.•Used longer lead time than was necessary.•Carried more stock than was needed.•Financial penalty.
    • 35. Case Study 3 •300 retail shops selling wine, spirits etc drinks in UK. •New inventory software system introduced. •This was calibrated with historic demand and supplier data, process etc. •Went live but in a few weeks, were many out of stocks. •Discovered that software suppliers default settings for supplier lead time had not been changed (all set at 10 days). •Suppliers were located from New Zealand to Europe with various lead times from days to months.
    • 36. Case Study 3: Conclusion•No understanding at all of SLT.•No availability.•Financial penalty.•“Heads rolled”.Many issues can arise when lead times are not properlyconsidered.
    • 37. Analysing Lead Times• We must manage inventory on an item by item basis, therefore, analysis also must be on individual items.• Identify the stages in total SLT.• May sound simple; but is often difficult.• Not thought this way before = rethinking?• Likely SLT is managed by different functional departments/silos.
    • 38. No internal “joined up” thinking Procurement Production Logistics Marketing
    • 39. “Win the home games first” Procurement Production Logistics Marketing
    • 40. AnalysisOrder Decide Place Receive Despatch Deliver Available Total to order Order Order Order Complete for issueNumber Days1 14 14 15 29 07 08 26 March April April2 20 21 22 10 27 30 42 March April April3 25 25 27 17 15 15 52 March April May May
    • 41. LT stage analysis If lengthy, or considerable variability indicated by a high standard deviation, then analyse further. For example, the stage from supplier despatch to customer receipt could be split further into: Time supplier despatched order Time order is loaded onto ship at port Time order arrives at destination port Time order is cleared customs Time order arrives at customer warehouse.
    • 42. SLT & Planning Horizon•SLT is also a main determinant of the horizon over which weneed to plan. For example, if the supply lead time is 10 weeks, then itwill mean that we have to produce forecasts for the item that extend intothe future by 10 weeks.•More complicated when we make product ourselves.•Here there is also a production lead time, after the raw materialSLT.•Planning horizon is now the production LT plus SLT.
    • 43. Production Planning horizon Supply LT Production LT Planning Horizon
    • 44. Planning HorizonThe longer the planning horizon, then the more inaccurate is theforecast.Therefore reduced and stable lead times:•delivers a direct impact on stock levels•contributes to an improvement in forecast accuracy•reduces safety stock
    • 45. Controlling/Reducing lead times“Uncertainty is the mother of inventory”• Measure it, (many do not e.g. “handed over” by procurement)• Analyse it, especially the “plus/minus" and the “10-12 weeks”• KPI it. E.g. agreed standard is then compared to the actual.“Unless suppliers get their act together on lead times, then simply, we will change supplier”• Collaborate and work together; internally and externallyKey: Reducing the SLT variability is the priority, next, we can look to reduce the length of the lead time
    • 46. LT Variability; an exampleSupply Lead time (SLT) is halved from 12 to 6 weeks but thesupply lead time variability (SLTV) stays the same at 4 weeks Current SLT New SLT SLTV SLT SLTV SLTV SLT SLTV -4 12 + 4 -4 6 +4 Total LT = 8 to 16 weeks = 2 to 10 weeks (Index 100 to 200) (Index 100 to 500)So, if SLTV stays the same and only SLT is reduced, thenthere is actually a higher disruption factor.
    • 47. LT Variability; another scenarioSupplier quotes 12-16 weeks delivery time•Is it 12 or 16 weeks; does anyone ask?•Do people “play it safe” and use 16 weeks then add 10% for“contingency”; so we finish up with 18 weeks?•Eventually order is received in 12 weeks•Who measures/checks/monitors/reviews/makes changes?
    • 48. Summary of the Key Aspects in SLT•Supply Chain is about Movement, therefore we must “Managethe flows.”•All flows are affected by Time; the lead times are therefore criticalin our management of supply chains.•Inventory is the common concern of all in supply chains, internaland external collaboration is needed.•A mission of supply chain management is the reduction/elimination of inventory whilst optimally balancing costs, servicelevels and availability.
    • 49. Key Aspects in SLT Lead times must be measured/be controlled. •How long will the supply replenishment take? •How has the overall SLT been derived? •Supplier lead times must be challenged. •The longer the lead-time, the more stock. •Reducing lead times not only delivers a direct impact on stock levels, but an improvement in forecast accuracy and hence a reduction of stock. •Reducing the SLT variability is more important than reducing the length of the lead time.
    • 50. Key Aspects in SLT•Many issues can arise when lead times are defined in anarbitrary fashion.•Analysing lead times can be fertile improvement territory.Aims:•Fixed known reliable lead times.•Supply lead time predictability.
    • 51. Please: Beware of the Time wastersFour types:Internal to our-self; e.g. we do not see it as a problemLack of planning; e.g. do not know the SLT’sLack of self management; e.g. we do nothingLack of control at work e.g. “its up to them”
    • 52. Please never forget:Lead time is not just ExternalInternalTime decide needTime place orderExternalTime order received Supplier LT Supply LTTime product despatchedTime product receivedInternalTime available for issueTime payment is available to supplier
    • 53. In our experience, a weak linkin the supply chain, is nearly always,supply lead time
    • 54. Lead Time- Getting it Right Was presented by Stuart Emmett Inspired by the book“Excellence in Inventory Management” by Emmett & Granville (2007)