Supplier Lead Times Impact Inventory Management

By Dhinesh Selvaraj

Lead time is a key component of replenishment policies. Shorter lead times are desirable, but getting shorter leads from suppliers is challenging. On the other hand, longer lead times result in higher on-hand and in-transit inventory. Additionally, longer lead times limit the supply chain response to changing demand, variability, and uncertainties. On-hand and in-transit inventory make up a big chunk of the total costs, on top of purchasing, transportation, warehousing, packaging, and even expedited shipping costs at times. Inventory is required for demand variability, lead time variability, and service levels but lower inventory or days on-hand is a key to resilient and responsive supply chain.

 

 

Any supplier lead time reduction project can be classified as either tactical or strategic. Both the methods need supplier collaboration, along with strong analytics to identify and quantify opportunity.

Quick wins can be achieved through tactical execution. Often supplier lead times in the system, which calculates the schedule of orders, might not reflect the actual time it might take the supplier to procure, make, and ship. There can be many reasons for this mismatch — from just an error in the data, to a real mismatch in the supplier’s information. For instance, a part having a long lead time in the system whereas the supplier can deliver the product in a much lower lead time. The problem lies in identifying these suppliers among all the suppliers of the firm and go after them to negotiate or understand their concerns for such longer lead times.

There can be other tactical scenarios, which could lead to supplier lead time reduction through negotiations, for instance, negotiating lead time reductions for A and B class parts (high runners), compared to C or D parts. There can be room for improvement in high runner lead time when mutually agreed upon terms, from stocking finished goods at the supplier’s end, to any process improvement that could lead to reduction in supply chain response time. Supplier relationships are very crucial for an efficient supply chain. Hence explaining to the supplier how lowering the lead times is of mutual benefit, becomes very important.

Strategically, lead time reduction can be achieved in two ways: by initiating vendor managed inventory (VMI) or by localizing the supply base. Both can have much bigger and sustainable impacts to supply chain costs. These decisions need end-to-end supply chain network modeling to perform scenario analysis, inventory observation, and when observation of change in structure happen to the supply chain.

CGN Global is currently engaged in a $36 million service parts inventory reduction project with a fortune 500 company. Most of the reduction is being achieved by reducing the supplier lead-times. The opportunities were identified based on the similar parts with multiple lead times within same part families and same suppliers.

At CGN, we work with clients to understand the firm’s business history and the relationship they have with their suppliers. With the help of the analytical thinking of our consultants and smart tools, we understand the real problem, provide sustainable solutions, and execute opportunities. CGN’s expertise in supplier collaboration and network modeling provide insights for effective negotiations and successful reductions in lead times, which results in a lean and resilient supply chain.