Chapter 5 : Strategic lead-time management

Time is a business commodity which has an enormous opportunity cost. Yet normal
business controls make no attempt to value or identify the scale or nature of this

long lead times mean a slower response to customer require- ments, 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

There are many pressures leading to the growth of time-sensitive markets but
perhaps the most significant are:

1. Shortening life cycles

the lead time to re-supply a market determines the organization’s ability to exploit demand during
the life cycle of the product and the ability to ‘fast track’ product development, manu- facturing
and logistics becomes a key element of competitive strategy.
 Fast to market and fast to produce
 the ability to minimize the time it takes to develop new products or make rapid design
changes
 this form allows firms to gain a market edge by being able to consistently introduce more
new products or large numbers of product improvements/variations faster than its
competitors

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

3 Volatile markets make reliance on forecasts dangerous

many forecasting errors are the result of inap- propriate forecasting methodology, the root
cause of these problems is that forecast error increases as lead time increases.
All forecasts are prone to error and the further ahead the forecast horizon is the greater
the error. this figure shows how forecast error increases more than proportionately
over time.
 The concept of lead time

Clearly Lead time is becoming crucial competitive variable as more and more markets
become increasingly time competitive the concept of lead time can be seen from two different
view :

1 The order-to-delivery cycle

The amount of time from when an order is received from a customer to

when the completed order is shipped is called delivery cycle time. This time
is clearly a key concern to many customers, who would like the delivery
cycle time to be as short as possible

Customer Order Order Order Transport Order

places entry processing assembly received
order

Each of these steps in the chain will consume time. Because of bottle- necks, inefficient
processes and fluctuations in the volume of orders handled there will often be considerable
variation in the time taken for these various activities to be completed
 2 The cash-to-cash cycle

The cash to cash cycle is the time period between when a business pays cash to its suppliers
for inventory and receives cash from its customers.

Logistics pipeline management

The key to the successful control of logistics lead times is pipeline man- agement.
Pipeline management is the process whereby manufacturing and procurement lead
times are linked to the needs of the marketplace. At the same time, pipeline
management seeks to meet the competitive challenge of increasing the speed of
response to those market needs.
The goals of logistics pipeline management are:

● Lower costs
● Higher quality
● More flexibility
● Faster response times
In examining the efficiency of supply chains it is often found that many of the activities that take
place add more cost than value
Very simply, 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. The old
adage ‘the right product in the right place at the right time’ summarizes the idea of customer value-
adding activities. Thus any activity that contributes to the achievement of that goal could be
classified as value adding.
On the other hand, non-value-adding time is time spent on an activ- ity whose elimination would
lead to no reduction of benefit to the customer. Some non-value-adding activities are necessary
because of the current design of our processes but they still represent a cost and should be
minimized.
Pipeline management is concerned with removing the blockages and the fractures that occur in the
pipeline and which lead to inventory build-ups and lengthened response times. The sources of these
block- ages and fractures are such things as extended set-up and change-over times, bottlenecks,
excessive inventory, sequential order processing and inadequate pipeline visibility.
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 re-engineering.

The lead-time gap

The difference between logistics lead time and the customers order cycle time is called lead time gap.
Lead time gap =logistics lead time –customers order cycle time .
Where
Logistics lead time = total time to complete the manufacturing and product.
Customer order cycle time = time that customer is prepared to
waits from when the order is placed to the goods received
 Summary
In a world of shortening product life cycles, volatile demand and con- stant competitive
pressure, the ability to move quickly is critical. It is not just a question of speeding up the
time it takes to get new products to market, but rather the time it takes to replenish
existing demand. Markets today are often ‘time-sensitive’ as well as ‘price-sensitive’, thus
the search is for logistics solutions that are more responsive but low-cost. Time compression
in the pipeline has the potential both to speed up response times and to reduce supply
chain cost. The key to achieving these dual goals is through focusing on the reduction of non-
value-adding time – and particularly time spent as inventory. Whereas in the past logis- tics
systems were very dependent upon a forecast, with all the problems that entailed, now the
focal point has become lead-time reduction.
 Chapter 6 :The synchronous supply chain

The extended enterprise and the virtual supply chain

The nature of business enterprise is changing. Today’s business is increasingly

‘boundaryless’, meaning that internal functional barriers are being eroded in favour of
horizontal process management and exter- nally the separation between vendors,
distributors, customers and the firm is gradually lessening. This is the idea of the
extended enterprise, which is transforming our thinking on how organizations compete
and how value chains might be reformulated.
Underpinning the concept of the extended enterprise is a common information
‘highway’. It is the use of shared information that enables cross-functional, horizontal
management to become a reality. Even more importantly it is information shared
between partners in the supply chain that makes possible the responsive flow of
product from one end of the pipeline to another. What has now come to be termed the
virtual enterprise or supply chain is in effect a series of relationships between partners
that is based upon the value-added exchange of infor- mation. Figure 6.2
illustrates the concept.
 The role of information in the virtual supply chain

Leading organizations have long recognized that the key to success in supply chain
management is the information system. However, what we are now learning is that
there is a dimension to information that enables supply and demand to be matched in
multiple markets, often with tailored products, in ever-shorter time-frames.
The Internet has in many ways transformed the ways in which supply chain members
can connect with each other. It provides a per- fect vehicle for the establishment of the
virtual supply chain. Not only does it enable vast global markets to be accessed at
minimal cost and allow customers to shorten dramatically search time and reduce
transac- tion costs, but it also enables different organizations in a supply chain to share
information with each other in a highly cost-effective way. Extranets as they have come
to be termed are revolutionizing supply chain management. Organizations with quite
different internal informa- tion systems can now access data from customers on sales or
product usage and can use that information to manage replenishment and to alert their
suppliers of forthcoming requirements.
The IT solutions now exist to enable supply chain partners to share information easily
and at relatively low cost. A major benefit that flows from this greater transparency is
that the internal operations of the business can become much more efficient as a result.
For example, by capturing customer demand data sooner, better utilization of produc-
tion and transport capacity can be achieved through better planning or scheduling.
 Collaboration in the supply chain

The closer the relationship between buyer and supplier the more likely it is that the
expertise of both parties can be applied to mutual benefit.
For example, many companies have found that by close co-operation with suppliers they can
improve product design, value-engineer components, and generally find more efficient ways
of working together.
This is the logic that underlines the emergence of the concept of ‘comakership’ or
‘partnership sourcing’. Co-makership may be defined as:

The development of a long-term relationship with a limited number of suppliers on the basis
of mutual confidence.
The principle of co-makership can be extended in both directions in the supply chain –
upstream to suppliers and downstream to distributors, retailers and even end users. The
prizes to be won from successful co-makership potentially include lower costs for all
parties through reduced inventories and lower set up costs as a result of better schedule
integration. The implications for competitive strategy are profound. The new competitive
paradigm is that supply chain competes with supply chain and the success of any one
company will depend upon how well it manages its supply chain relationships.

Summary
The key to supply chain responsiveness is synchronization. Synchronization implies
that each entity in the network is closely con- nected to the others and that they share the
same information. In the past there was often limited visibility, either upstream or
downstream, meaning that organizations were forced to act independently, making their
own forecasts, and, as a result, inevitably relying upon a ‘push’ rather than a ‘pull’
philosophy.
Underpinning successful supply chain synchronization is, firstly, the information systems
capability to capture data on supply and demand and, secondly, a spirit of co-operation
across the so-called ‘extended enterprise’. In practice it is the latter issue that tends to limit
the extent to which synchronization can be achieved.
Nevertheless, as more examples of the financial benefits of ideas like quick response and
Vendor Managed Inventory come to be publicised, the likelihood is that supply chain
synchronization will come to be more widely practised.