Use Anticipated not Average Lead Times
By Jon and Matt Schreibfeder
In our newsletter articles this year, we are reviewing the 15 steps for achieving the goal of effective inventory management. That is, “to meet or exceed customers’ expectations of product availability while maximizing your net profits or minimizing your total inventory investment.” This month we’re going to review replenishment lead times.
In order to meet or exceed your customer service goals you must reorder a product when you have enough left in your warehouse to meet customer demand during the time it takes you to obtain a replenishment shipment. For example, if you sell 2 pieces per day, and it takes 7 days to receive a replenishment shipment, you must reorder the product when there are no less than 14 pieces in inventory.
The anticipated lead time is the length of time you estimate is necessary to order and receive a replenishment shipment of an item. Anticipated lead times should be separately maintained in a computer system for each product, in each warehouse, from each source of supply. The anticipated lead time from the primary source of supply is normally used in calculating the “order point” or minimum quantity. Note that the minimum quantity is not the smallest amount of a product you will have on hand, but the amount of inventory that will prompt you to reorder the item.
Many systems calculate an anticipated lead time by averaging the actual lead times associated with the last several stock receipts. This technique may give you misleading results. For example, if one shipment arrives in 14 days and another shipment arrives in 42 days the average lead time would be 28 days. But what if 42 days was the normal anticipated lead time for the item?
Many distributors have found that replenishment is better managed by setting anticipated lead times equal to the longest typical lead time for each item. For example, if actual lead times for an item range from 2 to 4 weeks, they will maintain a 4 week (i.e., 28 day) anticipated lead time for the product. This will help ensure that adequate inventory is available to cover customer demand during the time it takes to replenish stock. After all, half of the lead times associated with stock receipts will be greater than the “average” lead time (and half will be less than the average lead time).
Be sure when determining the anticipated lead time for a vendor or particular product to take into account all four of these factors:
- The time it takes you to place a replenishment order once you know that more stock is needed.
- The time it takes your supplier to fill your order and ship it to you.
- Transit time to your warehouse.
- The time it takes you to unpack and prepare the stock received for sale or use (including inspection and repackaging, if necessary).
But if the anticipated lead times in your system are manually maintained, how does a buyer know when the value for a particular product needs to be updated?
A good computer system should identify unusually long and short lead times and bring them to the attention of a buyer. Unusual lead time analysis begins with the system comparing the lead time associated with each just-arrived stock receipt to the existing anticipated lead time for the product. If there is a significant difference between the two values, the appropriate buyer should be notified. A significant difference might meet any of the following criteria:
- The lead time for the most recent stock receipt is less than 50% of the existing anticipating lead time. For example, the anticipated lead time for a product is 10 days and the actual lead time associated with the latest stock receipt is less than five days.
- The lead time for the most recent stock receipt is more than 50% greater than the existing anticipated lead time. Perhaps the anticipated lead time for a product is again 10 days but the actual lead time associated with the latest stock receipt is more than 15 days.
- The lead time associated with the latest stock receipt is more than a week greater or a week less than the existing anticipated lead time.
When notified of a possible unusual lead time the buyer should contact the supplier to determine if the lead time associated with the most recent stock receipt is actually unusual (i.e., due to a factor that probably will not recur) or indicative of the anticipated lead time of future shipments. If it is unusual no action is necessary. However, if it is a good prediction of the lead time of future shipments, the anticipated lead time for the product in your replenishment system should be updated to reflect how long you anticipate it will take to receive future shipments after they are ordered.
Remember that avoiding stockouts is, to a great degree, dependent on reordering products at the right time. Accurate anticipated lead times are a critical factor in effective stock replenishment.