Inventory is expensive. By looking carefully for unneccessary delays in the supply, manufactures have an opportunity to cut lead times and improve business outcomes substaintially.
Pulse Electronics, an electronic components provider, recently announced it had reduced its product lead time by 50 percent, to four to five weeks. The expected results of reduced lead times are, among others, shortened order-to-cash cycles, reduced inventories, and less of a dependence on forecasts.
Pulse's move was right on the money as far as Gene Tyndall of Tompkins International and Doug Kane of One Network are concerned, as they explained in this webinar.
“High tech supply chains have longer lead times due to lot of the production being located in Asia,” said Kane.
Kane divides total lead time, the time it takes to get a product from a manufacturing facility to a store shelf, into two parts: physical lead time and systemic lead time. Physical lead time speaks to the duration it takes product to move, let's say from Asia to North America, typically on the order of four weeks. Systemic lead time involves the stops it makes along the way, some of them perhaps unnecessary, and the delays encountered in moving goods because of problems such as ineffective communications.
“It is not unusual for electronics to experience 33 days in physical lead time combined with 29 days of systemic lead time, for a total of 62 days in actual lead time,” said Kane. “In other words, systemic lead makes up nearly half of the total lead time.”
This state of affairs leads supply chain partners to carry 70 days of stock to ensure that they can satisfy customer demands. “When you are carrying high-value inventory and combine that with short product life cycles,” said Kane, “what typically happens is that you have an undersupply of products that are fast selling and way too much of stuff that isn't selling. All that adds up to excessive inventory costs.”
It stands to reason that cutting lead time by 50 percent, as Pulse Electronics did, will have the effect of reducing total supply chain inventories and, consequently, costs. “So it's worth considering how to get rid of systemic lead time,” said Kane.
Tyndall suggested that managers assess their current level of supply-chain velocity. “They should examine how much time it is taking to move product through the various steps of the supply chain and see what they can do to reduce that time,” he said.
In addition, by implementing technologies that provide greater visibility into how products are selling, manufactures can build more to demand and less to potentially faulty forecasts. “There is no reason to load inventory on a ship, sometimes referred to as floating warehouses,” said Kane, “before you know where it is to go.”
By cutting lead times in half, manufacturers can increase supply-chain visibility and substantial values, according to Kane. It was reasonable to expect a 27 percent reduction in their own inventories and a 50 percent reduction in retailers' inventories, while maintaining fill rates north of 99 percent, he added.
Now, if Pulse Electronics can pull that off, they'll not only be doing themselves a big favor, but they'll also be a hero across their supply chain.