In previous articles we have pointed out that reducing the total replenishment lead time is a key factor in fixing many troubles that afflict supply chains.
By “total replenishment lead time” we mean what is sometimes referred to as the ToC Replenishment Time or Theory of Constraints Replenishment Time. It is the sum of the following factors:
- Order Lead Time (OLT) – the time that elapses between the first consumption of a unit from a SKUL (SKU-Location) and when the order for replenishment of that unit of consumption occurs
- Transportation (or Shipping) Lead Time (TLT) – the time spent in movement of an item during replenishment
- Production Lead Time (PLT) – the time between the release of an order for replenishment and the release of the shipment of replenishment goods
Dealing with Transportation Lead Times
Typically, reducing transportation lead times means an increase in the cost of transportation. In a firm where cost-world thinking abounds (read: the vast majority of companies in existence today), anything that “increases costs” is nearly always rejected off-hand.
One of the reasons this is so is that costs are so easily measured and easy to see. Costs are, in short, very tangible.
However, as W. Edwards Deming pointed out with such keen insight, all of the truly important numbers for managing a company for success are unknown and can never be known with absolute accuracy. It is impossible, for example, to know how many “potential customers” a company might have. Similarly, it is impossible to know what “market demand” is for a new product working its way through R&D.
Well, for supply chain managers and executives, another important number that can never be known with great accuracy is “the volume of sales lost due to out-of-stocks.”
This problem is exacerbated by the fact that “out-of-stocks” (OOS) virtually always affect sales on the most popular items, makes, models and colors. It’s never the “dogs” that you run out of—it’s the “hot sellers.”
So, when considering spending more money in order to make your supply chain more agile through reductions in TLTs, it is worth knowing your Throughput to Transport Cost Ratio. This single value (for each SKUL) tells you how many units you can ship at the higher cost for shipping before consuming the entire Throughput for a unit sold.
In the table above, consider a given SKUL we will call ‘Item A.’ In order to increase Throughput from this item, the supply chain managers have determined that greater agility is a must. They have also determined that shipment by air instead of sea freight will double the shipping cost per unit—from five percent to ten percent.
However, the change in Throughput after moving to air freight for this SKUL is only a negative five percent, while Throughput remains at 75 percent.
That means, the supply chain managers and executives conclude, that for every additional sale (every sale not lost to out-of-stocks) covers the additional freight costs for 15 units (75% divided by 5%).
This is the kind of reasoning and innovation that helps take companies from being competitors to being leaders in their region or even their industry.
In our next article, we will talk about actions you can take toward reducing PLT (Production Lead Time).
In the meantime, we would like to hear what you have to say and about the challenges you face with your supply chain—big or small. Please feel free to post your comment here, or contact us directly, if you wish.
