Why Lead Time Matters More Than Forecast Accuracy

by Bernard Milian

One of our customers recently asserted that the reliability of their lead times is more important than the reliability of their forecasts.

This company, which has widely deployed Demand Driven practices throughout its chain, recently saw inventory at one site gradually increase and exceed the target range. The site is a distribution center supplied by intercontinental maritime flows. What caused the increase in inventory? When executives investigated, it became clear that lead times between Asia and Europe had decreased significantly. The planned lead times, however, remained unchanged, so the shorter lead times translated into excess inventory.

This example is probably indicative of a lack of lead time parameters management in our supply chain practices. How many of you include forecast accuracy in your KPIs, and how many measure lead time accuracy?

Managing Lead Time Parameters

When we start a Demand Driven project, one of our first steps is to review a client’s lead time parameters. Often, we are surprised to find that these are the most neglected parameters that are used in the ERP. Sometimes, lead times are missing; other times, they have been set to zero, or have not been reviewed for a long time, or are in the head of the buyer.

Production lead times can be the subject of debate. Supply, transit, and quality release times are open to interpretation. Don’t deny it, I see some of you who recognize yourselves…

Yet while determining demand — using forecast or historical average consumption — is subject to structured approaches and continuous updating methods, the monitoring and updating of lead times in the item master file is generally unstructured, lacks supporting tools, and is underestimated — especially in a replenishment / made to stock flow.

We have demand managers, in other words, but no lead time managers….

Nicolas Vandeput, the author of several books and specialist in forecasting processes, recently cited the example of a multinational company that enforces an inventory model on its sites… in which they forgot to integrate lead times! This is symptomatic.

Lead Times and DDS&OP

When you regularly review your operating model — preferably on a monthly basis — be sure to build the measurement and gradual updating of lead times into your discipline.

The term “gradual” is important. Just as a variation in average daily consumption or average daily forecast must be cleaned of outliers and smoothed over a period of time, the average replenishment lead time measurement must be analyzed, smoothed, and reflected in a controlled manner in the planning parameters.

About right — and stable — is better than precise but wrong and unstable.

Anticipating lead time trends on future flows, especially procurement and transportation, is also a very good idea — and a relevant talking point between purchasing, logistics, and supply chain teams during S&OP supply reviews.

Reducing Lead Times is the Most Effective Lever for Improvement

Let’s not forget that the best way to improve operational agility is to reduce lead times. Clearly defining lead times and displaying them as KPIs thus helps focus attention and drive improvement actions.

Production lead times are particularly important to work on, as this will enable reduction of fixed planning horizons, which in turn will directly improve forecast accuracy. Forecasts are always more accurate as the forecasting time-scale reduces. Putting planned lead times under pressure by reducing them step by step will make it possible to ask the right questions, reduce work-in-progress, make the flow more fluid, and avoid committing production resources too early so as not to manufacture the wrong products, and end up with shortages of the right products.

What if we paid more attention to our lead time than to our forecasts?

Get in touch.

For more information, contact KenTitmuss.

About the Author
Bernard Milian has more than 35 years of experience in developing agility within industrial and distribution supply chains. He has more than 25 years of experience in Supply Chain Management and Continuous Improvement / Lean 6 Sigma transformation. He has served as a Supply Chain Director within French subsidiaries of world class corporations, in the automotive, electronics, medical devices, furniture and metallurgy industries, B2B, B2C, manufacturing and distribution environments