chapter-5 lead time.pptx

CHAPTER 5 STRATEGIC LEAD-TIME MANAGEMENT Chapter outline 1. Time-based competition 2. Lead-time concepts 3. Logistics pipeline management 2 Introduction Customers in all markets, industrial or consumer, are increasingly timesensitive. In other words they value time and this is reflected in t...

CHAPTER 5 STRATEGIC LEAD-TIME MANAGEMENT Chapter outline 1. Time-based competition 2. Lead-time concepts 3. Logistics pipeline management 2 Introduction Customers in all markets, industrial or consumer, are increasingly timesensitive. In other words they value time and this is reflected in their purchasing behaviour. Thus, for example, in industrial markets buyers tend to source from suppliers with the shortest lead times who can meet their quality specification. In consumer markets customers make their choice from amongst the brands available at the time; hence if the preferred brand is out of stock it is quite likely that a substitute brand will be purchased instead. 3 In the past it was often the case that price was paramount as an influence on the purchase decision. Now, whilst price is still important, a major determinant of choice of supplier or brand is the ‘cost of time’. The cost of time is simply the additional costs that a customer must bear whilst waiting for delivery or whilst seeking out alternatives. There are many pressures leading to the growth of time-sensitive markets, but perhaps the most significant are: 1 Shortening life cycles 2 Customers’ drive for reduced inventories 3 Volatile markets making reliance on forecasts dangerous 4 1 Shortening life cycles 5 .the effect of being late into the market and slow to meet demand. However, it is not just time-to-market that is important. Once a product is on the market the ability to respond quickly to demand is equally important. Here the lead time to re-supply a market determines the organisation’s ability to exploit demand during the life cycle. It is apparent that those companies that can achieve reductions in the order-to-delivery cycle will have a strong advantage over their slower competitors. 6 2 Customers’ drive for reduced inventories Many companies still think that the only way to service customers who require just-in-time deliveries is for them, the supplier, to carry the inventory instead of the customer. Whilst the requirements of such customers could always be met by the supplier carrying inventory close to the customer(s), this is simply shifting the cost burden from one part of the supply chain to another – indeed the cost may even be higher. Instead what is needed is for the supplier to substitute responsiveness for inventory whenever possible. 7 Figure 6.3 suggests that agility can enable companies to break free of the classic trade-off between service and cost. Instead of having to choose between either higher service levels or lower costs it is possible to have the best of both worlds 8 3 Volatile markets make reliance on forecasts dangerous -A continuing problem for most organizations is the inaccuracy of forecasts. It seems that no matter how sophisticated the forecasting techniques employed. - The volatility of markets ensures that the forecast will be wrong! Whilst many forecasting errors are the result of inappropriate forecasting methodology, the root cause of these problems is that forecast error increases as lead time increases. Many businesses have invested heavily in automation in the factory with the aim of reducing throughput times. In some cases processes that used to take days to complete now only 9 Lead-time concepts From the customer’s viewpoint there is only one lead time: the elapsed time from order to delivery. 1- The order-to-delivery cycle 2 The cash-to-cash cycle 10 1- The order-to-delivery cycle From a marketing point of view the time taken from receipt of a customer’s order through to delivery (sometimes referred to as order cycle time (OCT)) is critical. In today’s just-in-time environment short lead times are a major source of competitive advantage Equally important, however, is the reliability or consistency of that lead time. It can actually be argued that reliability of delivery is more important than the length of the order cycle – at least up to a point – because the impact of a failure to 11 deliver on time is more severe than the need to order further in Each of these steps in the chain will consume time. Because of bottlenecks, inefficient processes and fluctuations in the volume of orders handled there will often be considerable variation in the time taken for these activities to be completed. The overall effect can lead to a substantial reduction in the reliability of delivery. As an example, Figure 6.5 shows the cumulative effect of variations in an order cycle which results in a range of possible cycle times from 5 days to 25 days. 12 13 2 The cash-to-cash cycle -As we have already observed, a basic concern of any organization is: how long does it take to convert an order into cash? In reality the issue is not just how long it takes to process orders, raise invoices and receive payment, but also how long is the pipeline from the sourcing of raw material through to the finished product because throughout the pipeline resources are being consumed and working capital needs to be financed. 14 Lead-time components Figure 6.7 illustrates the way in which cumulative lead time builds up from procurement through to payment. 15 Strategic lead-time management 16 Logistics pipeline management -The key to the successful control of logistics lead times is pipeline management. 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 17 -The achievement of these goals is dependent upon managing the supply chain as an entity and seeking to reduce the pipeline length and/or to speed up the flow through that pipeline. In examining the efficiency of supply chains it is often found that many of the activities that take place add more cost than value. For example, moving a pallet into a warehouse, repositioning it, storing it and then moving it out in all likelihood has added no value but has added considerably to the total cost. 18 value-adding time 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 non-value-adding time is time spent on an activity whose that goal could elimination would lead to no reduction of benefit to the customer. be classified as value adding. Some non-value adding activities are necessary because of the current design of our processes they still represent a cost and should be minimised. but 19 non-value-adding time The difference between value-adding time and non-value-adding time is crucial to an understanding of how logistics processes can be improved. Flowcharting supply chain processes is the first step towards understanding the opportunities that exist for improvements in productivity through re-engineering those processes. Once processes have been flowcharted, the first step is to bring The difference between value-adding time and non-valuetogether adding time is the managers involved in those processes to processes debate and agree crucial to an understanding of how logistics can be improved. exactly which elements of the process can truly be described as value adding. Agreement may not easily be achieved as no one likes to admit that the activity they 20 are responsible for does not actually add any value for customers. The next step is to do a rough-cut graph highlighting visually how much time is consumed in both non-value-adding and value-adding activities. Figure 6.8 shows a generic example of such a graph. Figure 6.9 shows an actual analysis for a pharmaceutical product where the total process time was 40 weeks and yet value was only being added for 6.2 per cent of that time. It will be noted from this example that most of the value is added early in the process and hence the product is more expensive to hold as inventory. Furthermore, much of the flexibility is probably lost as the product is configured and/or packaged in specific forms early in that process. Figure21 6.10 - - 22 An indicator of the efficiency of a supply chain is given by its throughput efficiency, which can be measured as: Throughput efficiency can be as low as 10 per cent, meaning that most time spent in a supply chain is non-value-adding time. Figure 6.11 shows how cost-adding activities can easily outstrip valueadding activities. 23 The challenge to pipeline management is to find ways in which the ratio of value added to cost-added time in the pipeline can be improved. Figure 6.12 graphically shows the goal of strategic leadtime management: to compress the chain in terms of time consumption so that cost-added time is reduced. Focusing on those parts of the graph that are depicted horizontally (i.e. representing periods of time when no value is being added), enables opportunities for improvement to be 24 identified. Reducing non-value-adding time improves service and reduces cost 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 blockages 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 25 examined in detail. These interfaces provide fertile ground for Reducing logistics lead time Because companies have typically not managed well the total flow of materials and information that link the source of supply with the ultimate customer, what we find is that there is an incredibly rich opportunity for improving the efficiency of that process. In those companies that do not recognize the importance of managing the supply chain as an integrated system it is usually the case that considerable periods of time are consumed at the interfaces between total process and in inefficiently performed procedures. To enable the identification of opportunities for reducing end-to-end pipeline time an essential starting point is the construction of a supply chain map. 26 A supply chain map A supply chain map is essentially a time-based representation of the processes and activities that are involved as the materials or products move through the chain. At the same time the map highlights the time that is consumed when those materials or products are simply standing still, i.e. as inventory. In these maps, it is usual to distinguish between ‘horizontal’ time and ‘vertical’ time. Horizontal time is time spent in process. It could be in-transit time, manufacturing or assembly time, time spent in production planning or processing, and so on. It may not necessarily be time when customer value is being created but at least something is going on. The other type of time is vertical time, which is time when nothing is happening and hence the material or product is standing still as inventory. No value is being added during vertical time, only cost. The labels ‘horizontal’ and ‘vertical’ refer to the maps themselves 27 where the two 28 6.13 depicts such a map for the manufacture and distribution of men’s underwear. From this map it can be seen that horizontal time is 60 days. In other words, the various processes of gathering materials, spinning, knitting, dyeing, finishing, sewing and so on take 60 days to complete from start to finish. This is important because horizontal time determines the time that it would take for the system to respond to an increase in demand. Hence, if there were to be a sustained increase in demand, it would take that long to ‘ramp up’ output to the new level. Conversely, if there was a downturn in demand then the critical measure is pipeline volume, i.e. the sum of both horizontal and vertical time. In other words it would take 175 days to ‘drain’ the system of inventory. So in volatile fashion markets, for instance, pipeline volume is a critical determinant of business risk. Pipeline maps can also provide a useful internal benchmark. Because each day of process time requires a day of inventory to ‘cover’ that day then, in an ideal world, the only inventory would be that needed to cover during the process lead time. So a 60-day total process time would result in 60 days’ inventory. However, in the case highlighted here there are actually 175 days of inventory in the pipeline. Clearly, unless the individual processes are highly time variable or unless demand is very volatile, there is more inventory than can be justified. 29