Reducing Supply Lead Time

Supply lead time measures the average lime between when an order is placed and when the product arrives. Long lead times reduce responsiveness and add to the inventory the supply chain must carry. 

In our discussion so far, we have assumed that each stage of the supply chain has a well-defined demand and supply distribution that it uses to set its safety inventory levels. In practice, this is not true for multiechelon supply chains. Consider a simple multiechelon supply chain with a supplier feeding a retailer that sells to the final customer. The retailer needs to know demand as well as supply uncertainty to set safety inventory levels. Supply uncertainty, however, is influenced by the level of safety inventory the supplier chooses to carry. If a retailer order arrives when the supplier has enough inventory, the supply lead time is short. In contrast, if the retailer order arrives when the supplier is out of stock, the replenishment lead time for the retailer increases. Thus, if the supplier increases its level of safety inventory, the retailer can reduce the safety inventory it holds. This implies that the level of safety inventory at aU stages in a multiechelon supply chain should be related. 

Return to the Sam s Club store in Exercise 6. Assume that the supply lead time from HP is normally distributed, with a mean of 2 weeks and a standard deviation of 1.5 weeks. How much safety inventory should Sam s Club carry if it wants to provide a CSL of 95 percent How does the required safety inventory change as the standard deviation of lead time is reduced from 1.5 weeks to zero in intervals of 0.5 weeks ... 

Supply lead time is reduced to six weeks. As a result, two orders are placed for the season, one to be delivered at the beginning of the season and the other to be placed at the end of week 1 and delivered at the beginning of week 8. 

The only way to avoid this is by strict analysis of the supply chain from the customer order to final product delivery. Definition of the optimized (theoretical) process and sequential work towards a high service level approach allow the identification of gaps, and of opportunities which might not always be the cheapest (ship versus train versus plane) but could be the most effective way to reduce capital costs and shorten planning scope - an important aspect, especially in volatile customer markets with long production processes on the (chemical) supplier side. As in the case of CIP, this needs clear parameters, KPIs, commitment from all players, and regular tracking. The most important parameters are the lead time for all products, optimal lot sizes, replenishment points, and safety inventories. 

Figure 22.5 shows how product, customer, and market characteristics can determine different SCM strategies and design implications. For example, the strategic choice to serve niche customers with high price specialty chemicals is only tenable if the high-value inventory is centralized to reduce costs, and if a fast, responsive supply chain is set up to fill customer orders within the requested lead time from central inventory. 

The lure of parametric release to commercial organizations is undoubtably monetary, either as reduced inventory costs or as reduced lead times within the supply chain. The cost balancing this out is better process control. From the standpoints of quality, sterility assurance, and responsibility to the recipient of the sterile product, the loss of a wholly inadequate end-product test is a low price to pay for more attention being given to the process characteristics that really influence sterility. 

In Stem (2005), I have set out scenarios which show how price developments in the domestic and European markets will impact on both investment in new supply and the attractiveness of sales to the different markets. This has been highlighted by the November 2006 commitment by the Russian government to increase prices for industrial and power customers to European netback levels by 2011. Substantially higher domestic prices will create downward pressure on domestic gas demand which will allow Gazprom to either increase exports or reduce production. But in the power sector, rapidly increasing demand, and the long lead-times necessary for building either coal or nuclear plants - even if that were deemed to be the correct policy - may create short-term gas demand which is relatively insensitive to price. ... 

The earlier section focused on reducing lead time, but an ideal supply chain choice could locate inventories to optimize supply chain costs. 

In particular, consider an alternate proposal for the rail option, whereby the trains travel at a lower average lead time that is less variable. Since transport cost per unit of train shipments is low, these lower average lead time and less variability could reduce both the in-transit inventory holding costs to ship by rail and the associated safety stock. We examine next the impact of these changes on the total supply chain cost experienced by the shipper. 

The project [33] describes a new system in which truck capacity was split so that deliveries of engineering goods, whose demands were predictable, were done once every two weeks. However, delivery of hard-to-predict educational supplies was done overnight, via the school s internal mail system. This synchronization of delivery lead times to part demand characteristics improved system performance. The reorganized system observed faster delivery without any increase in truck capacity and reduced costs by over 150,000 per year. 

The current process flow is analyzed to determine nonvalue added activities. Then, a second sub-group out of the nonvalue added group is selected by considering what if RFID was deployed. A thorough investigation of each step, along with interviews with experts and additional data collection, the RFID-enhanced value stream map is reduced to 18 steps, as opposed to 54, which represents 66.7% improvement in number of steps. Such an improvement not only makes the supply chain more reliable but also reduces the overall lead time drastically, which is estimated to be a reduction of 60%. 

A Develop alliances or partnerships Negotiatefor demand-driven supply chain Reduce lead-times Cost reduction incentives Add business Negotiate consigned or demand-driven supply chain Reduce lead-times Focus on "A" SKUs Move B C items to other suppliers Reduce lead-times... 

Note that all the lead-time (LT) and time between purchases (TBP) parameters used in this example can be reduced. This will decrease initial inventory along the supply chain and the size of reorder quantities. Reducing reorder quantities increases the level of continuous flow in the supply chain. Also note that the method automatically takes into account the lead-time. Lead-time changes, of course, should be monitored to adjust Qq. 

Based on the demands on the system, a final assembly target or drumbeat was established at 400 units per week. This provided enough output to supply current needs, catch up on past-due orders, and reduce lead-times to six weeks over the previous six months. The assembly manager had his targets and key metrics to measure the department s performance. If they fell behind, immediate action could be taken to correct the problem. 

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