company resource center white papers

Making the Case for Lean Process Lead-Times:
Are your informatirmation process flows giving you a competitive edge?

It doesn't matter if one is talking about a meal at a restaurant or making an aircraft engine, each of these activities require a period of time to accept an order; plan, source and perform the work; deliver the end product; and collect payment. Regardless of the markets served, most producers have a common need: to respond and adapt to changes in the marketplace faster than their competition does. The premise is that by reducing the order fulfillment cycle time, the producer is better positioned to win more business from his competitor, as well as expand the market.

The Supply-Chain Operations Reference (SCOR®) model identifies order fulfillment cycle time as a key component of supply chain responsiveness (the speed at which a supply chain provides products to a customer). They define it as: "the average actual order cycle time which is consistently and reproductively achieved." For each individual order, this cycle time starts from the order confirmation and ends with the product's release, and implementation if applicable.

When cycle time shrinks, the organization has more options to react when the unexpected happens. By reducing the overall order fulfillment cycle time, a business gains operational flexibility and can increase their competitive edge.

Of course, one of the ways to shorten the order fulfillment cycle is to produce the product or service faster. And traditionally, when discussing Lean, this is a key area of focus. But when you look at what percentage the order fulfillment cycle time is tied to producing the product, in most cases, this is rarely the greatest portion of the process. In the example on the next page, which describes a "build-to-order" environment, 1 day (5%) of cycle time is consumed making the actual product. Clearly, the most immediate impact is gained through reducing the administrative or information processing cycle times.

The order fulfillment cycle can be split into "quote-to-order" and "order-to-delivery" cycles. The "quote-to-order" cycle is the time from when the customer makes an initial inquiry, to when the order is placed. In some industries, such as automotive, industrial, high-tech, and aerospace & defense, this process may include specifying the configuration to be ordered, with multiple iterations to reach a consensus on configuration, quantity, price and delivery date. Being able to respond to these inquiries rapidly and effectively (by determining if the required item exists in inventory or if the required capacity and components are available) can afford companies a tremendous advantage in winning new business.

Within each of the subsequent process steps from order to delivery, there are additional administrative delays tied to the transformation of information. As the order moves from inbox to outbox of successive departments (to set up the required information for production), move and wait times accumulate against the order while the clock is ticking.

In our example below, the 10-day cycle time is actually comprised of 3 days of administrative time (purchase order placement) and 7 days material lead-time. If we take the 20-day cycle time and subtract 7 days material lead-time and the 1 day manufacturing lead-time, that would leave 12 days of administrative cycle time that can be targeted for improvement without having to touch manufacturing or supplier processes. If the company can achieve only a 20% improvement against the 12 days that would reduce the order fulfillment cycle time from 20 to 17.6 days. This means the company can take additional orders (if they have spare capacity), and has the flexibility to double the manufacturing time from one to two days within the same cycle time window. Alternatively, the company can deliver the order to the customer sooner.

20 Days Order Fulfillment Cycle Time (Current)

-7 Days material lead-time
-1 Day manufacturing lead-time

12 Days Administrative Cycle time (Target)

X 20% reduction = -2.4 Day

17.6 Days Order Fulfillment Cycle Time (Future)

As well, in many manufacturing industries, the manufacturing lead-time exceeds the order lead-time, meaning that companies need to pre-manufacture sub-assemblies. In other industries, particularly those satisfying consumer demands, finished product needs to be positioned in warehouses near the point of consumption. So reducing administrative lead-times may allow the company to adopt a postponement strategy, or keep work-in-progress inventory at an earlier stage of manufacturing, thereby reducing the risk of manufacturing the wrong items or placing them in the incorrect warehouse.

Whether it's an increased capacity to win new business, better order delivery performance or improved inventory management, adopting Lean information processing cycle times can provide companies with much desired flexibility and competitive advantage.

Examining Administratiministrative Lead-times

Understand what is important to your customers

When looking at a function (order fulfillment), it is important to define the individual processes as either value-added or non value-added from the customer's viewpoint. While there is often opportunity to improve value-added processes (manufacturing of the product), it is clear we should first tackle the elements that consume the most amount of cycle time to have the greatest impact on responsiveness.

Customers look at non value-added (administrative) steps in any business process as waste. Waste robs value from the customer.

Consider someone who has had a bad experience in a restaurant waiting an excessive amount of time to be seated, or to place an order for drinks and food, or for paying the bill? Would one agree the wasted time in a restaurant is a loss for both buyer and seller? How many of these disgruntled customers simply choose not to return to that place of business?

If a disappointed customer was interviewed, what would be learned? Would it become obvious that the restaurant needs to examine opportunities to:

• eliminate unneeded steps,
• combine activities,
• do steps in parallel instead of in sequence, and/or
• perform certain tasks later.

It is important for companies to challenge their processes by stepping outside the walls of the business and walking those processes with a fresh set of eyes from the perspective of the customer.

Understand what is important to your bottom line

Wasteful processes consume precious resources. It detracts from the primary mission of the business.

A great example is the US Army. They have targeted cycle time reductions for almost ten years with solid results. Notice on their website, under the "Current Situation" that none of the targeted processes actually involve the core mission: Combat.

Administrative lead-time time is easily measured by the customer, and can impact revenue, profit and competitiveness. By managing administrative lead-times, companies can better deliver on the primary mission of the business.

Recognize that ‘non-value added' does not equal ‘non-essential'

While customers may only see value in processes that touch them (transforming the inputs into the finished product), this doesn't mean non value-added steps are unimportant. And some value-added steps are disguised.

Consider the analogy of someone hiring a landscape worker. The customer notices the worker sitting in the corner with his back to him, and thinks the worker is taking a break. The man would work for a while and then kept going back to the corner. The customer became concerned as the worker appeared to be taking a lot of breaks. Later in the day, the customer was walking his dog and looked back from a different angle and laughed to himself. He was sharpening his tool!

Develop processes based on reality, not the ideal

There is a visioning exercise called the Ideal Final Result (IFR). In this process, one imagines what the world would be like if there were no barriers or constraints and all problems solved themselves. It is a great tool for resetting the mindset of a team, to help get them thinking outside the box.

Perfect World Scenario

• Customer's always place orders with plenty of lead-time and never make changes.
• All incoming materials arrive on time with perfect quality.
• All parts are produced with no variation.
• There are no engineering changes.
• Employees don't get sick or change jobs.

Had enough? Wouldn't this be terrific? Here's the point. Our administrative processes are based on this ideal world view! We know that change is the only constant, and yet our processes treat change as the exception instead of the rule. It is critical that our processes account for the inevitable, and often quite significant, volatility of today's business environment.

Administrative Process Improvement Examples: Strategy Considerations

Requisition to order: Reducing cycle times by leveraging IT

Years ago, a $10 billion (US) manufacturing conglomerate deployed an enterprise-wide E-Procurement system. Prior to deploying the solution, many business units were using paper requisitions to purchase non-production materials. One of the burning platforms that drove the need for this change were the tremendous delays associated with mailing requisitions across locations for budgetary and sourcing approvals. The software allowed a user to create a requisition and send it simultaneously to the right people for approval, including in the case where there were multiple approvals required. Try doing that with a single piece of paper! The result was significantly reduced cycle times for converting a requisition into a purchase order.

A September 2008 research paper by Aberdeen Group, "The Impact of E-Procurement in North America" found that enterprises have significantly improved their performance as a result of utilization of e-procurement initiatives. Per the average performance improvements highlighted below, requisition-to-order cycle time alone was reduced by 70%.

Significant administrative cycle time improvements can be made in the procurement arena in particular, which is one of the key drivers of order fulfillment cycle time.

Customer Order Promise: Creating value, not trade-offs

This is a key customer-facing process.

In a 2008 Supply Chain Digest article, "Order Promising is where the Supply and Demand Balancing really Intersect,"5 Dr. Larry Lapide was quoted as saying "The order promising process addresses a basic customer question: Can you fill the order when the customer wants to take delivery and, if not, when can you? If planning inadequacies cause supply shortages or if a customer's expectations are set too high, the order will not be filled satisfactorily." The article goes on to point out that "This becomes especially critical given the advance of Lean low inventory) and make-to-order supply chain approaches, when a customer can no longer bank on piles of inventory to support order promising."

As illustrated on the following chart, when a customer order is received, almost half of survey respondents simply quote standard lead-times without checking availability of supply. While this method certainly has a "lean" administrative cycle time (simply looking up the lead-time), how often are these companies hitting the promise date, compared to those who are using Available-to-Promise or Capable-to-Promise?

The lesson learned here is that simply reducing the cycle time for an administrative process without understanding the total impact may create a trade-off, rather than create true value for your business and your customer.

Customer Order Change: Treating change as the expected, not the exception

Remember back to our perfect world scenario? The reality is that customers do make order changes. One of the greatest sources of demand variability is the changes made by customers inside of the order lead-time. The longer the lead-time, the greater the window is for change to occur.

When change orders do occur, what can be done? There are reactive and proactive approaches.

The reactive approach is basic blocking/tackling/firefighting and expediting. This approach is surprised by changes. It is unexpected and sudden, and requires urgent action (depending on how important the customer is). For most companies, this is standard operating procedure.

The proactive approach on the other hand is to expect change and to establish processes that account for change. Instead of looking at order changes as exception, they are treated as the norm.

Some proactive methods include:

• collaborating with the customer, defining and coming to a consensus on demand on an as-needed basis;
• monitoring supply and demand activities in real-time to see misalignments, or demand escalations and de-escalations before they hit the lead-time window;
• responding quickly (i.e. adjusting promise-dates) based on new information.

Instead of constantly reacting to "unplanned" order changes and looking at demand changes as the exception, the discerning company can let change be the norm and establish a capacity to manage change.

Comparing the two choices, reactive versus proactive, the effect on administrative lead-times are clear.

The Takeaways

By understanding what information processes comprise the order fulfillment cycle time, and reducing them, your company can be more competitive due to the increased flexibility in responding to market dynamics.

• Actual production and material lead-times are typically a small portion of total cycle time, and therefore looking at non-production administrative processes that have long cycle times may be the best place to start.
• To do so, it is critical to look at the processes from the customer perspective—walk through the process, (in person if possible) to understand the larger view.
• Given today's environment, it is important to establish processes that treat change (i.e. order change) as the norm instead of the exception.
• Ultimately, by adjusting your information processes, significant improvements can be made on both supply and demand facing processes, providing benefit to a company's top and bottom line.

ABOUT KINAXIS

Kinaxis™ RapidResponse is a single on-demand service that empowers multi-enterprise manufacturers with integrated demand-supply planning, monitoring, and collaborative response capabilities. RapidResponse embraces human judgment to enable planners and front-line responders to handle unpredictable changes. Global leaders such as Casio, Honeywell, Jabil, Qualcomm, and Raytheon use RapidResponse to achieve breakthroughs in sales and operations planning (S&OP), demand management, supply management, and supply chain risk management. The results are superior customer service, improved operations performance, and a competitive market advantage. For more information, visit the Kinaxis web site at www.kinaxis.com or the company's blog at blog.kinaxis.com.

Comments on this paper?
Want to learn more?
Please join us online at:
http://blog.kinaxis.com