Background. On time delivery (OTD) along with profit have always been the key measurements ever since I started to work in the field of electrical equipment and appliance manufacturing in 1997. Throughout the years, different process improvement and optimization initiatives such as inventory, manufacturing, of-fice, factory, and supply and value chains were conducted all over the global or-ganization. These initiatives were based on different approaches like Theory of Constraints (TOC), Six Sigma (6 ), Toyota Production System (TPS), Lean man-ufacturing, and Sales and Operations Planning (S&OP). Despite the different ap-proaches taken, all improvement projects have had two common targets. These targets have been the increasing of profits and decreasing the lead time.
In a time of economic boom many firms, including electrical equipment and ap-pliance manufacturers, experience an increase in demand. When demand exceeds the available capacity many firms tend to increase the order backlog by selling with longer lead times. Increased order lead times can cause issues with on time deliveries and thus customers are more likely to try alternative suppliers, and in the worst case even change the preferred supplier for an alternative one. The loss of sales due to inadequate product or service delivery times is difficult to quantify with the existing system data. Even so, it is obvious that reduction of order lead times means fewer inventories, less rework, higher quality, and less overheads, which ultimately has impact on the bottom line, as less costs (Handfield 1995), the impact of time for a specific order line and item cannot be quantified with the rule of thumb. Despite the fact that the overall benefits of TBC and quick re-sponse manufacturing (QRM) have been documented, previous research on cost benefits is quite limited (Tubino & Suri 2000).
Motivation. During my time as a consultant in a corporate operational excellence group I needed to find concrete evidence on the impact of lead time. In order to get concrete evidence, I started to systematically collect project results from dif-ferent projects on which our internal experts had been working. The focus was to collect the status of the customer order lead time (COLT), production lead time (PLT) and OTD before and after the project in order to indicate the changes. At the same time, I collected the calculated net present value (NPV) for the projects.
As a result, I was able to build a list of lead time improvement that contained re-sults from 15 different projects from the years 2000-2007. The collected values were not available in all of these projects. Thus, all projects could not be analyzed at all levels. However, as shown in Figure 1, the analysis of the results in nine different projects indicates the possible connection between lead time reduction and improvement in OTD.
Figure 1. Project specific changes of COLTs, OTDs and achieved OTD levels.
Similarly, as in Figure 1, the PLT reduction appeared to have mostly positive im-pact on OTD figures in Figure 2.
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98 % 66 % 86 % 95 % 95 % 94 % 90 % 95 % 93 %
Customer order lead time (COLT) reduction effect on on time delivery (OT D)
Achieved OTD Change in OTD
Reduction of COLT
Figure 2. Project specific changes of PLTs and OTDs.
Also the lead time improvement in 15 different projects indicated that lead time reduction had positive impact on OTD (Figure 3).
Figure 3. Impact of lead time improvements on OTD improvement.
If the lead time had impact on OTD, the monetary value of the lead time needed to be tested. Here, the focus was to test if the lead time reduction projects have had impact on the calculated NPVs for the projects. As shown in Figure 4, the lead time reduction was likely to impact on the projects´ NPV as to OTD.
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Figure 4. Impact of lead time improvements on OTD improvement.
The preliminary analyses on the lead time impacted OTD. In this industry, im-provement in OTD does not only mean satisfied customers but also better profita-bility through less late delivery penalties. The lead time is also likely to impact on the profitability through less capital being tied up in inventories, less inventory holding costs and higher throughput. Even though the preliminary results were encouraging, the level of detailed information was limited. Also the cost savings and productivity improvement figures used for the NPV calculations were only indicative and calculated values. All this combined with the fact that during the years 2005-2007 firms operating in electrical equipment & appliance manufactur-ing experienced a significant peak in demand, motivated me to examine the lead time impact in more detail.
This economic boom definitely changed the balance in the scale of the three com-petitive characteristics, which according to Hopp and Spearman (2000) were cost, quality and speed. As part of manufacturing, quality and cost were emphasized a lot, but speed, also known as order lead time, has not been considered as measur-able in the firms. The speed of the order lead time seemed to increase a notch as a competitive dimension during this period, for two reasons. First of all, quality was something that was self-evident for the customers in the electronic equipment and appliance business. Secondly, prices were very much determined by the competi-tion and markets in the business sector. As such, the importance of speed in the order delivery process appeared to be much more needed as a competitive dimen-sion than in the past.
During that period the pressure on order lead times became obvious through cus-tomer needs. Firms pushing their capacities to the limit had to build up a backlog of orders. Increased order lead times placed customer and supplier relationships under pressure. This period appeared to be a perfect opportunity to test whether speed in the order lead time was really essential. Many firms had already spent endless hours trying to benchmark the competition to achieve best practice
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petitive strategy for their business, only to discover that they had only limited access to information on their competitors. Limited business intelligence on com-petitors´ order delivery processes and their profitability provided no further in-formation on the competitive advantages of different order lead times. However, this dead-end turned the focus towards highly sensitive information that could be made available through existing business contacts. The available information was on order delivery and financial information within the global electronic equip-ment and appliance manufacturing firm. Here especially, the possibility to explore the speed of order delivery and profitability in detail raised interest in future re-search work.