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The importance of lead times for business performance improvement

Posted on: 06-12-2018 09:27:301078

Lead times may cause headaches in two ways. They can be too long, and they can be unreliable. Both situations may frustrate your customers and hurt your business performance, and they turn out to be interweaved.

Waiting too long

The first headache is lead times that are too long. Customers get frustrated when they feel like they have to wait too long and will probably change to another supplier when there are affordable alternatives available. Keeping an ample supply of the finished products will solve the issue of having to wait too long, but it comes at a price of keeping inventory.

But what’s the reason for these long lead times? One reason can be the generated lead times of your supplier, when these are too long this will automatically cause your lead times to be too long when you don’t carry ample stock. Another reason can be the internal mechanisms. The internal lead time of a product is the sum of the hands-on time and the waiting time. The hands-on time is the time needed on a machine or a workplace to manufacture the product. The waiting time is the time that a product stands in a queue of orders, waiting to be worked on, and the length of the waiting time is a function of the available capacity and the time needed to produce the orders that have already been released. It goes a bit too far to go into the details of these lead times in the context of this blog, but one can say that for example in a typical job shop environment, the hands-on time will be much lower than the waiting time. In the case where there are always 9 orders released with 4 hours hands-on time, the waiting time of the 10th order will always be 36 hours, bringing the hands-on time waiting-time ratio to 10%-90%. In practice this ratio can be like 2%-98% or even lower.

Internal too long lead times are not only unpleasant for the customer, they are also unpleasant for the level of the working capital. The longer the goods are on the floor, the more cash is needed to finance the work in process.

The issue of unreliability

The second headache is ‘unreliable’ lead times. Unreliable lead times cause logistical control problems in industrial environments, where production planners and planning systems assume that the needed parts and subassemblies will be available on time. Long lead times may not be too much of a problem there, as long as the quoted lead times are reliable. The planning system will order the needed parts earlier. Unreliable lead times generate uncertainty, and planners will have to buffer (ergo keep safety stock) to cope with that uncertainty.

Lead time is an important driver for uncertainty. The longer the lead time, the higher the chance that something can go wrong, thus the higher the uncertainty. Reducing internal lead time reduces uncertainty and reduces the work in capital. That is why so many logistical control methods and improvement methods like JIT, Lean, TOC and Balancing Workload focus on reducing the work that has been released to the production floor. Less work on the floor reduces the waiting time which reduces the lead time, which reduces the unreliability or uncertainty. One can also detect flow blocks or production defects earlier when there is less stuff on the floor (the idea behind ‘lowering the level of the river of inventory’ image in the JIT).

Lowering the level of released work will not necessarily reduce the lead time however. The orders will be waiting in the order portfolio, waiting to be released. But the lead time of the released orders will be much more reliable. Adding capacity can be one of the means to lower the internal lead times physically. Not working first in-first out in a controlled way at order release (e.g. by allowing an A-customer order to overtake a B-customer order) can also reduce the lead times of ‘important’ orders, lengthening the lead time of the ‘less important’ orders.

Changing customer perception

Besides physically shortening the lead times and lowering the lead time unreliability one can also apply psychological methods to change the perception of the customer. Do read David Maister’s article ‘The psychology of waiting lines’ (easy to find on Google) to get to know more about this subject. ‘Managing expectations’ is key in his approach. His techniques are used in amusement parks for example, as I realized when I was in a queue for an attraction with my children. The remaining waiting time “45 minutes queueing time from here” was announced at various points in the line. When we finally arrived at the attraction entry, I checked my watch to be pleasant to note that ‘we only had to wait 35 minutes’ to get there… it made us feel good. Amazing not, I just blew 35 minutes of my precious time and I was pleased that it was ‘only’ 35 minutes… At the end of the day I found out that they did that for every queue. It is one example of what cleverly managing expectations is about. Me checking the remaining time in the rest of the queues also proved the validity of Maister’s proposition ‘Occupied time feels shorter than unoccupied time’.

The improvement journey to reduce lead times must start by getting a thorough insight in the current lead times and the current lead time unreliability or variability. That can be done by investigating the delivery history, the open orders, the quality of the planning master data and the logistical control methods in place for the materials. ‘Process mining’ is another approach to identify and understand the actual lead times. Not an easy task in an SAP environment when you must set this up from scratch, with all the tables actively used in these functions.

Because reducing lead times and controlling lead times is such an important mission to improve the customer satisfaction and to improve the business performance Every Angle has this knowledge built in to make your life easier and to carry out these analyses faster. Read more about it here.

Jacques Adriaansen 
Business Improvement Thought Leader

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