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Questioning the Global Supply —
The Power of Lead Time

Globalization has become a major focus for many supply chain professionals. However, moving
manufacturing to low-cost countries reduces flexibility, increases lead times and makes build-to-order
manufacturing (which should without question be the goal of any supply chain professional) difficult to
impossible. Since the supply chain infrastructure you are building now may be difficult to dismantle
down the road, as supply chain professionals we need to take global sourcing very seriously.

Robert Martichenko

THERE IS NO QUESTION that globalization has become a focus,if not the main focus, for many supply chain professionals. The trend for moving manufacturing to low-cost countries (LCC) has been accelerating over the last two decades. Companies that have high labor content in their products can benefit from the move to LCCs. However, we should be asking whether all initiatives to globalize actually produce results in bottom-line financial performance.
The decision to move to LCCs is typically nothing more than a spreadsheet exercise. You load up your cost model and see what the net unit price is domestically versus off-shore. Ideally, your cost model will not just look at unit price but will take into consideration all associated costs including transportation, inventory carrying and risk costs such as air expedites and parts shortages. However, even the most rigorous of cost models cannot take into consideration what may be the most important dynamic of the global supply chain— that is, the impact of increased lead times.
To begin,let’s review a few definitions of lead time.
1. Outbound Logistics Lead Time: The amount of time it takes to stage, ship and transport an order to the customer upon receiving a customer order.
2. Manufacturing Replenishment Lead Time:The amount of time it takes for you to manufacture your product after you receive a customer order.
3. Inbound Logistics Lead Time: The amount of time it takes to order and receive material from your supply base in order to manufacture your product.
With these definitions in mind, we can define total lead time as the amount of time it takes for us to order material from our supply base through to when we deliver product to our customer. (Note: A more rigorous definition of lead time would include the time it takes you to get paid from the customer after the customer receives the order.)

Building to Order and Eliminating Overproduction
If you were to design the perfect manufacturing process, there is no question that it would be a manufacturing process where you build to customer order (BTO). In this perfect world, you carry no inventories and initiate your inbound supply chain and manufacturing processes only after you receive a customer order.The brilliance of BTO is that you eliminate overproduction because you don’t order material from your suppliers or manufacture finished goods until you have a firm order. As well,there is no need for warehousing or storage of any kind, as you simply flow product to the customer upon completion of the manufacturing process. In essence, this is the definition of a pull system, where the customer order triggers supply chain activities to fulfill the order, resulting in no overproduction.
This drive to eliminate overproduction must be on the minds of all supply chain professionals, since overproduction is without a doubt the worst organizational waste that exists. Defined as building (or buying) more than you need or earlier than you need it, overproduction creates other serious wastes such as excess inventory, excess warehousing and excess transportation. BTO also eliminates the need for forecasting, which in turn results in the elimination of excess inventories due to forecasting errors. Eliminating the need for forecasting is another key area that supply chain professionals need to be focused on.
It’s clear that BTO is the perfect solution to a waste-free supply chain. However, BTO requires that a specific dynamic be in place to succeed: Total lead-time must be less than customerorder-to-delivery lead time expectations. In other words,if the competitive environment states that customers expect to receive a product 10 days after placing an order, a BTO process would require you to order and receive material from your suppliers and then manufacture and ship the product to the customer in less than 10 days. Although many of us will never reach the state of perfect BTO, this needs to be the stretch goal for the lean supply chain.

Forecasting —Push and Lead Time
Forecasting simply means that we need to guess what customers might order, and therefore what we need to build or buy now to be prepared for the future customer order. Although there are simple to extremely complex forecasting models, no algorithm or software has cured the number-one law of forecasting, which states that forecasts are guaranteed to be wrong.What is overlooked at times, though, is the second law of forecasting, which states that the further out the forecast is,the more wrong it will be. Consequently, if our goal is to reduce our exposure to waste created by inaccurate forecasts, we need to focus on lead-time reduction.To understand this, we need to review why we forecast in the first place.
Building on our discussion around BTO, forecasting is required when we have the opposite condition from what is required to build to order.Forecasting is required when: Total lead time is greater than customer-order-to-delivery lead--time expectations. If we cannot order material,manufacture and ship in less time than our customers expect from the point they order, then we are forced to forecast (guess) what the customer may want. At that point,we order material from our supply base and pre-build product in anticipation of the customer order we forecasted. The result of this process is overproduction (inventory with no demand) or not having enough of what the customer wants. This is the quintessential push system. You pre-build to forecast and then push the product into the marketplace. Unfortunately, this push process will never lead to business excellence.
Successfully moving from push to pull requires a disciplined approach to leadtime reduction.This means that,as a supply chain professional, you absolutely need to be focusing on all aspects of lead-time reduction. This brings us full circle to the global supply chain.

Inbound Logistics — Flexibility and Lead Time
Once you understand that lead-time reduction is at the root of implementing pull systems (which needs to be the goal), you look at the elements of total lead time. The focus must then be to reduce each component of total lead time. Consequently, you need to reduce inbound logistics lead time. In fact, reductions in inbound logistics lead time will significantly contribute to creating flexibility in the supply chain. This flexibility will allow you to get closer to pull, which in turn will eliminate overproduction and improve customer fill rates.
Flexibility is a word that we hear a lot these days relative to supply chain management. Flexibility in the supply chain defines our ability to react when market conditions change.Market conditions can be described as the changes that take place in product and product quantity demand. For example, customers will change what products they want and in what quantities they want them.Therefore, flexibility is our ability to change with the market to meet customer demand as quickly as possible when market conditions change. The more flexible we are, the faster we can react and the less obsolete inventory we will carry when conditions change. How do you become more flexible? Reduce lead times in inbound logistics. Take an example where a manufacturer (or distributor) has a domestic supplier that is one day away from the manufacturer. Supplier-order-to-delivery lead time is two days. This means the manufacturer orders material from the supplier and it arrives at the manufacturer two days later.With this arrangement, the manufacturer simply needs to know what they are going to build two days out in horizon. Therefore you can define their flexibility level as being two days. If market conditions change, the manufacturer can readjust on the third day. Using this same example,the manufacturer moves this supplier to a lowcost country. Inbound logistics lead time becomes thirty days.Now the manufacturer is forced to determine what they will build thirty days from now in order to determine what to order from the supplier.Within these thirty days, if market conditions change, the manufacturer does not have the flexibility to react. When Day 30 arrives, they will build what they have material to build, even though it may not be what the market is demanding. This results in wasteful overproduction, which leads us to ask, why would you do anything that is going to increase lead times and reduce flexibility?

The Future and Lead Time
There are a lot of good reasons for some companies to globalize. Building product in a country to sell in that country makes perfect sense. Sourcing material when it can support lead time reduction is a smart business move.However, do not fool yourself into thinking it is simply a matter of domestic or global piece price.There are significant implications for the supply chain in moving to low-cost countries. Increased lead times reduce flexibility, force increased reliance on forecasting and result in overproduction, the worst of all organizational wastes. While we may understand the implications of lead time conceptually, we are clearly making business decisions that ignore lead time. The challenge is that it may take years for us to realize the net effect of some of these decisions.

The supply chain infrastructure you are building now may be very difficult to dismantle down the road. Consequently, as supply chain professionals, we need to take global sourcing very, very seriously.

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