Over the next few months, we will discuss setting meaningful replenishment parameters. Today’s article deals with the importance of setting accurate anticipated lead times.
The anticipated lead time is the amount of time (usually expressed in days) we estimate it will take to replenish our stock of an item from the primary source of supply. Reordering products at the right time in order to prevent a stockout requires accurate anticipated lead times. For example, say you had demand for a product of two pieces per day and an anticipated lead time of seven days, You should reorder the product when you have no less than 14 pieces in stock (two pieces per day times seven days). If the lead time for the item was actually 10 days (instead of the seven days recorded in your system) you would need 20 pieces to meet demand during the lead time (two pieces per day times 10 days). If you had waited to reorder until there were 14 pieces left in inventory, you would have experienced a stockout before the replenishment shipment arrived.
Many systems calculate an anticipated lead time for an item by averaging the lead times associated with the last several stock receipts from the primary source of supply. Unfortunately this can lead to several problems:
- As we described in the example at the beginning of the article, an average lead time will not adequately cover demand when the actual lead time associated with a stock receipt exceeds that average lead time.
- If the lead time associated with an item suddenly becomes drastically longer or shorter, previous stock receipts are not representative of the new anticipated lead time from the supplier. It will take several stock receipts reflecting the new anticipated lead time for the calculated average to reflect the actual length of time it will take to receive a replenishment shipment from the normal source of supply.
We suggest the anticipated lead times be manually maintained and set to the longest normally anticipated lead time from the primary source of supply. For example, if the lead time for a product ranges from three to four weeks, set the lead time to four weeks (i.e., 28 days). This will help ensure that replenishment shipments arrive in time to prevent stockouts.
When maintaining anticipated lead times, be sure to include:
- The time it takes you to place an order once you realize that a replenishment shipment is needed.
- The time it takes the vendor to fill the order and ship the material.
- The time it takes to ship the material to your facility.
- The time it takes to unpack the shipment, inspect the material, and prepare it for sale or use.
Of course, atypical long lead times can be ignored. For example suppose a vendor “forgets” to ship a product and – just this one time – an item that normally has a four-day lead time arrives in four months. Unusually short or long lead times (e.g., shipments that arrive more than a week early or a week late) should be brought to the attention of the appropriate buyer. The buyer should contact the vendor to see if the early or late shipment is exceptional or reflective of the anticipated lead time for future shipments.
Accurate anticipated lead times are an important element in achieving effective inventory management. Buyers must closely monitor this important parameter to ensure that replenishment orders for material are issued when there is adequate stock on hand to satisfy customer demand during the time it takes to order and receive additional stock.
Next month’s article will deal with safety stock.