Lead time has a strong effect on the size of your inventory and its reduction should be a top priority in your parts inventory control. Too much lead time ties up cash in a large inventory – cash that could be used to get more sales or to price your products more competitively.

To illustrate this point, imagine that you could instantly process a customer order and immediately generate and send an order to a vendor who is across the street from your business. Imagine that the vendor can reliably deliver to your door within half an hour of your order. This would mean you could do away with your inventory altogether. It would also mean that you would need little, if any, demand forecasting, because even if you got a lot of unexpected orders, you would still be able to get the items within half an hour from your vendor.

The opposite situation would lead to costs that would compound upon themselves. Suppose your organization were very inefficient and required two months to process a customer order and then send your own order to your vendor. Your vendor is also inefficient and requires four months to produce the items that you ordered. Because this vendor is in another country on the opposite side of the globe, shipment of the item requires an additional six months.

You now have an overall lead time of one year. This means that you will need enough inventory stock to handle at least one year’s worth of customer orders. The problem is that demand forecasting a year in advance for your industry is extremely inaccurate. This requires a very large safety stock to provide a safety buffer against this high degree of uncertainty. As you can see, there is a multiplier effect of costs associated with having a very long lead time.

To reduce lead time, break it down into the following three components:

• Review period
• Manufacturing time
• Shipment time

The review period is the time between receiving a customer order and sending an order to your vendor. In the second example above, with the long lead time, you would have to analyze why the review period took two months to complete. By radically streamlining your review period, a significant cost reduction to your business can be achieved.

Manufacturing time is the time required for the vendor to deliver the items to your business upon receipt of your order. This entails the time for manufacturing the item but it will also include the vendor’s review period. While it’s more difficult to reduce manufacturing time, it is possible – is there an incentive you can offer your vendor to get deliveries faster?

The shipment time can be reduced by specifying a preferred mode of shipment. Do this if the savings in inventory costs override the increased expense of a faster shipment method. In the case of reducing long lead times, the multiplier effect is now working in your favor because the disproportionate effect of lead time on costs is working in reverse. Reductions in lead time will result in a reduction in costs.

Acumen Information Systems can help you with your inventory challenges. Contact us to learn how.