Why is Lead Time so Important to Planning?

I often get asked what is the most important aspect of inventory planning.  The answer is easy, accurate lead times.  Lead time is one of the most important and influential data inputs to your demand and inventory planning software.  It still amazes me how often companies will blindly use the lead times provided to them by their vendors and not validate or calculate the true, performance lead time before placing an order.

Demand and inventory planning software is extremely sensitive to bad data.  We have all heard the expression, "garbage in, garbage out".  Nothing could be more true when talking about bad lead times.  Inaccurate lead times will impact and degrade your forecasting, safety and cycle stock calculations, and replenishment plan.

How does Lead Time Impact your Forecasting?

Perhaps the most overlooked consequence of poor lead times is the impact it has on your forecasting.  Best of breed software solutions will use lead time to calculate how wrong your forecast might be over the lead time horizon - lead-time forecast error.   The lead-time forecast error will influence which forecast model is selected in sophisticated statistical forecasting engines.  If your lead time is not accurate, your forecast engine may not be selecting the best forecast model in its simulation or tournament of best fit since the projected forecast error over lead time may be unreliable.  After all, planners, like forecasting software, should be most concerned with the lead-time forecast when reviewing the accuracy  of monthly or weekly forecasts.

How does Lead Time Impact your Safety and Cycle Stock?

There are numerous ways to calculate safety and/or cycle stock.  When optimizing your safety stock based on service level objectives, not only is the forecast and forecast error considered, but so should the lead time and the lead-time error.  More simply put, the longer the lead time and the likelihood your supplier won't perform to that lead time, the more safety stock you should carry to maintain your service, and vice versa. 

When placing orders, if you are trying to minimize your total annual costs by using the economic order quantity (EOQ) to define your cycle stock (:= 1/2 EOQ), the EOQ is directly proportional to the forecast, which as already discussed, could be unreliable as the forecast selection is dependent upon the projected forecast error over lead time.  ​

How does Lead Time Impact your Order Plan?

The replenishment plan is the system calculation most impacted by poor lead times. Having inaccurate lead times could either generate orders too earlier or not early enough.  The calculated receipt dates could also be wrong which in turn impacts your ability to fulfill customer orders if inventory is not available when it is expected.  Generally, it is when planners are reviewing their order plan that they will see and consider the impact of bad lead times. The results of which are felt by your entire business.

What should be your takeaway?

Having a system calculate and manage (1.) lead time along with (2.) an estimate of how wrong your lead time may be is critical to optimizing all functions of your planning software.  Planning for poor lead times will be felt by the entire business and, possible, lead to inventory imbalances - overstocking and understocking. Lastly, lead time is only hyphenated when it is used as a compound adjective.  For example, it is really important to focus on your lead-time accuracy.

greg marmulak | founder | dash/APPLICATIONS
a software and inventory expert, greg has been living inventory optimization for the past 18 years, working with manufacturers, distributors, and retailers.

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