How to Fix Supply Chain Troubles - Production Lead Times

We have been talking about reducing the “ToC Replenishment Time” as a key factor in fixing many troubles that afflict supply chains.

Remember, the ToC Replenishment Time or Theory of Constraints Replenishment Time is the sum of the following factors:

1. Order Lead Time (OLT)
2. Transportation (or Shipping) Lead Time (TLT)
3. Production Lead Time (PLT)

See the previous articles for more details.

How to Reduce Production Lead Time (PLT)

Many supply chain managers and executives who only buy from assemblers or manufacturers feel that nothing they can do will affect what their manufacturing trading partners do with regard to production lead times.

What these managers and executives forget is, it is quite possible that some things they are doing today are, in fact, contributing to longer production lead times.

Permit me to offer a few examples:

1. Longer Order Lead Times (OLTs) lead to longer Production Lead Times (PLTs) – Perhaps it is by mutual agreement between you and your trading partner that your OLT is longer. It may take you six weeks, for example, to accumulate an order large enough to qualify for a “quantity price break” that gets you the margins you think you need on the products you buy from a given manufacturer. However, transfer batches and pricing batches need not be the same size. Supply chain collaboration means thinking beyond old methods and concepts. What is to keep you from negotiating a deal with your manufacturing trading partner where pricing is based on the total quantities purchased over the course of six months or even a year. Then, disconnected from pricing, replenishment orders can be of any size. Furthermore, if you take the next step of providing visibility to actual demand on a weekly (or, better yet, daily) basis to the manufacturer, the manufacturer can pace its manufacturing to actual demand and not wait to get that huge order before deciding on what products to commit to manufacturing. In fact, it is probably advisable to place your replenishment orders on a weekly or daily basis (separated from pricing agreements). That way, not only does the manufacturer have visibility into actual demand, he can rely on firm orders (not forecasts or guesses) when committing his manufacturing resources to production of the products you need. That means fewer stock-outs and short lead times between the manufacturer’s receipt of your replenishment order and the shipment of replenishment stock.
2. Reduce or eliminate policy-induced demand variability – We all know what demand variability does to production. Since demand varies and production resources are limited, supply chain and inventory folks are constantly gazing into crystal balls trying to figure out how best to apportion their limited resources toward the production of goods. The more variability there is in the system, the more difficult it is to make good guesses. As a result, resources frequently end up being committed to the production of the WRONG products (products NOT in demand at the moment) while the RIGHT products (those with immediate actual demand) wait in the queue to be produced. As a result, the manufacturer ends up being overstocked on things you do not need while the order you (and your customers) really want in-hand ends up being delayed. Supply chain managers and executives are constantly trying to shake variability out of the system while, in a great many of the cases, other parts of their organization—typically finance, sales and marketing—are busy creating policies and programs that add more and variability in demand. The policies and programs introduced by finance, sales and marketing add variability in demand that is entirely avoidable (or at least almost so).Every time sales management or finance introduce sales quotas or incentives with a fixed date attached, it is likely that they are introducing variability into the supply chain.Let us say, for example, that salespeople will receive an extra 1.5 percent bonus on all sales in excess of $1 million they close in each quarter. What happens?Sales in the early part of the quarter may languish or even stumble. But as the quarter-end date draws nearer, you can depend upon the fact that sales will spike. Somehow those salespeople who found it so difficult to close a deal in week one of the quarter will suddenly find a way to close three or, even, five deals in the last week of the quarter in order to get their bonuses.All of the demand variability introduced by such ill-advised policies and procedures can easily be avoided by simply constructing sales incentives and marketing programs that provide a constant incentive to buy (or, from the salesperson’s point of view, to sell)—not one predicated upon whether it is the first week of the quarter or the last week of the quarter.Reducing demand variability will allow manufacturers in your supply chain to better allocate their resources and, thus, reduce their PLTs on all products.

We will pick up where we left off with some additional ideas for reducing PLTs in our next article. In the meantime, we would like to have you leave your comments here, or feel free to contact us directly, if you wish.