Theory of Constraints Supply Chain Lead Times

A Guide to Implementing the Theory of Constraints (TOC)
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Competitive Advantage – Short Lead Times

“If the market is dominated by a poorly performing organization and I want to take the market, all I have to do is develop a more responsive order fulfillment process. I do not need a higher quality product, a more advanced product, or even a cheaper product. If I care for your customers better than you do, they will be mine (1).”

Lead time can be an extremely important competitive advantage when stock is not held in advance. Many organizations, including many not-for-profit and service organizations where the customer is directly involved in the process, are essentially make-to-order businesses. You can’t store the finished product ahead of time; thus lead time is of critical importance. Many manufacturing and process organizations are also make-to-order. The order might be for a standard item or it might be for a unique “special” item that has to be designed first, however, it can still be made and delivered to the customer within the time-frame that the customer is willing to wait. Make-to-order businesses, whether service or production based, for profit or not-for-profit, can directly benefit from lead time reduction due to the removal of excess work-in-process, smaller transfer batches, and/or smaller process batches.

Lead time is a very important component in a customer’s perception of business performance. In a make-to-order business the lead time has a direct impact on the business and on the customer.

Total lead time is the result of total work in process (manufacturing lead time). This is primarily driven by;

(1) Excessive queue time/work-in-process.

(2) Batching of product.

(3) Batching in time.

Let’s look at each of these in a little more detail.

Excessive Queue Time/Work-In-Process

We have seen that in a production constrained system it is possible to introduce drum-buffer-rope and thereby increase the output, which has the effect of reducing the lead time by reducing the overall level of work-in-process. Let’s call this “drying the system out.” In the situation here where we have a market constrained system, we can not increase the output – it has no where to go – so we must reduce the input for a while in order to dry the system out.

It seems counter-intuitive, but by reducing the input, we decrease the work-in-process, decrease the lead time, and thereby stimulate demand. In contrast the not-so-unusual response to the previous long lead time in these situations was to put more work into the system even earlier on the premise that it might come out the other end on time. Hopefully we can now see that by increasing the input we would only make things worse, not better.

Batching Of Product

If we decrease the physical batch size we will reduce the amount of time spent in the process and this too will decrease the lead time. We dealt with this in some depth in the production section on batching. It may be worthwhile to check this again. Essentially there are two ways to approach lead time reduction in a make-to-order environment, either splitting batches into sub-batches while in the process – transfer batching – or releasing smaller discrete batches more often – process batches. Of the two, transfer batching offers the potential for the greatest decrease in lead time. Reductions in lead time of one half to one quarter or less are quite possible. Single-piece-flow is the ultimate version of transfer batching.

Batching In Time

If we increase the frequency of our schedule we will reduced the amount of time an order waits before it is launched to manufacturing. Don’t worry, there are organizations that still batch their schedule once a month or once a fortnight – we should be looking at once a day. This reduces but doesn’t completely remove batching in time effects.

Reducing the input using drum-buffer-rope will decrease the lead time. Increasing the scheduling frequency will decrease the lead time, and decreasing either transfer batch or process batch size will decrease the lead time. Having faster service levels than you competitors will stimulate demand for your products.

In fact because you are have spare operational capacity you can segment your market a little and make even more money. Let’s have a look at that.

Making Money Out Of People In A Rush

If our actual manufacturing lead time is shorter than our quoted standard lead time, or if we have a lot of spare capacity, or we can reduce transfer batch size on “hot” orders easily, then offering a premium “rush” service at a premium price is a tactic to increase cash flow. Aim to bring in new customers who haven’t yet availed themselves to the standard service – they soon will.

Making Money Out Of People With Time To Spare

Conversely, customers with time to spare are also a good source of additional revenue (2). Again it is dependent upon having sufficient spare capacity on hand. By offering a discount for long lead time for additional work, we can slot this work in to fill-out your work load. Care needs to be taken to segment these clients (isolate them) from the standard work, or else we will simply downgrade (discount) our existing clients without increasing throughput. Again we are aiming to bring in new customers or new work that hasn’t yet availed itself to the standard service.

Summary

Having a shorter lead time than competitors in a market constrained make-to-order environment is a significant commercial advantage. Obtained a shorter lead time is mostly policy driven in the form of reduced total work-in-process, reduced transfer or process batch size, and increased frequency of scheduling.

References

(1) Woeppel, M. J. (2001) Manufacturer's guide to implementing the theory of constraints, pg 22.

(2) Newbold, R. C (1998) Project management in the fast lane: applying the theory of constraints, pp 126-129.