How to Better Understand Effective Lead Time
Executive Summary
- What is Effective Lead Time?
- How is Effective Lead Time Different From “Normal” Lead Time?
- What is the Similarity to the Delivery Lead Time or Order Lead Time?
- Why is Effective Lead Time Central to Multi Echelon Planning and the Key to Understanding the Topic?
Introduction
Interestingly, the term “effective lead time“ is both rare and very important to understanding multi echelon planning. See this post on multi echelon planning after you have read this for a primer.
See our references for this article and related articles at this link.
Effective lead-time is not an intuitive concept, as I can relay from my experience explaining the concept to some people. I was exposed to the concept of effective lead-time for the first time through MCA Solutions’ manuals, and I certainly did not understand effective lead-time the first time I was exposed to it. Since then, I have written several articles positioning effective lead-time as the foundational concept of multi-echelon planning. No other supply planning method (MRP/DRP, heuristic, allocation, or cost optimization) has this concept or capability, and as such, none are as efficient at locating inventory as MEIO applications.
Effective Lead Time Versus The “Normal” Lead Time Concept
Effective lead-time is not the standard static lead-time between two locations that are brought in through the master data (which is how most supply chain professionals are trained to understand lead-times), but instead, it is a calculated value. Unlike standard lead times, effective lead-times are situational. It is the lead-time required in the particular circumstance or scenario in question. With multi-echelon software, the lead-times between the DC and RDC change depending upon the stocking quantity and the service level at the RDC. Software that lacks multi-echelon capability keeps the same static lead time regardless of the inventory held at the RDC.
Flexible Calculation
Effective lead-time—the concept that stocking positions are determined and affected by connected locations and the ability to model this in the decision making — is why this functionality is more accurate in determining where inventory should be stocked than the other methods of supply planning.
Effective lead-time variable calculation of the delivery lead time or order lead time based upon the flexible calculation of things like the procurement lead time, production lead time. Is the total lead-time required to deliver the product to its final destination?
- It is variable and dependent upon the stocking positions of higher echelons in the supply network.
- This is a conditional concept of lead time and can be considered the delivery lead time or order lead time in reality. That is it is the delivery lead time or order lead time based on the circumstance of the order.
This concept is entirely foreign to the normal usage of the term lead time, which is static and hard-coded into a system. The concept presented before effective lead time is that the total lead time is some fixed value. But if we look at the order lead time or delivery lead time of a particular order, we can see that the lead time or effective lead time changes depending upon whether and where the stock is in the supply network at the time the order is placed.
In the excellent paper by Cohen, Agrawal, and Agrawal on effective asset deployment, this is described.
Similarly, investing in additional safety stock at a central depot reduces the effective lead-time for replenishment at the “child” locations connected to it. This lead-time reduction will, in turn, affect the stocking requirements at the child locations. Alternatively, such decisions are often constrained by the budgets allocated to the service organization. Consequently, if a particular asset is assigned to a specific location, it affects what can be assigned to other locations. Thus, the service levels that can be offered to customers at various locations are affected by these decisions, and are, therefore, interrelated; a high level of service to one customer may imply a lower level of service to another. – Achieving Breakthrough Service Delivery Through Dynamic Asset Deployment Strategies, Cohen, Agrawal and Agrawal 2004
Definition of Effective Lead Time
Different demand levels, lead to different circumstances and different needs to move to a higher echelon in the supply network.
- The most important thing to consider is that while lead times between locations do not change (in the short term) effective lead times do change.
- For software to be considered multi echelon, it must have the ability to reflect the changes in effective lead time in its planning. This, combined with inventory optimization, is what allows the software to properly
- This, coupled with inventory optimization, is what allows the software to properly position, inventory to the right location, and in the right quantity based upon the demand, the current stocking position, and the service level.
It can also be described graphically which can allow the reader to more intuitively understand what effective lead time is.
Other Users of the Term Effective Lead Time
Another use of the term is when a company needs to determine if it has the raw materials/components/packaging material to make an order quantity.
- If a company can produce the sales order quantity from the available stock of all input materials, then the effective lead time is the production lead time.
- If the order quantity exceeds this, the effective lead time must include the procurement lead time.
That is the production lead time and procurement lead time’s implication into the effective lead time is conditional based upon the stock position in the network.
Obviously being able to calculate the delivery lead time or order lead time while conditionally including the production lead time or procurement lead time is a very sophisticated mathematical feat.
Conclusion
Two of the rules of what makes software multi-echelon are the ability to manage effective lead time.
- Effective Lead-time: Users must have the ability to compare the stocking position at different locations by calculating effective lead-times.
- Account for All Lead-time Variations:
Effective lead time requires software to be properly employed and calculated. However, even as a concept it is important to understand how supply networks operate.