One of the responsibilities of Sales and Marketing is to establish the lead-times that your company will quote to your customers. Although you might not normally make the association, this process sets the foundation for your company’s inventory exposure.
This exposure starts with the difference between the lead-time you quote to your customers and the total lead-time to secure supply through your supply chain. If you quote customers a two-week lead-time, and yet your cumulative lead-time to recognize demand, secure materials, and build products is 16 weeks, you have 14 weeks of uncovered exposure. In other words, you have to begin taking risk and investing in supply 14 weeks before you have real demand. Eventually this risk will catch up with you in the form of unnecessary inventory.
Whether your company uses a fully outsourced manufacturing model or internal manufacturing, you need to manage inventory exposure to protect your company’s financial health. In an outsourced model, your inventory risk may be less obvious on a day-to-day basis, but lurking in someone else’s warehouse is inventory with your name on it. In either model, the best way to reduce your risk is to move your quoted lead-time and your total lead-time closer together. Shrinking your total lead-time takes work, so how you approach this opportunity partially depends on your competitive situation for different products. This table gives you and outline of the strategy:
| Weak: Little Brand or Company Loyalty Impulse Purchase Low Cost of Change Ample Alternate Product Solutions |
Strong: Customer Loyalty Planned Purchase High Cost of Change Limited Alternate Product Solutions |
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| Relative Product Importance: Strategic Position, Revenue or Gross Margin Contribution |
High | I. This is your first priority. You need to shrink total lead-time to narrow gap with customer lead-time. Reduce risk by creating a flexible supply chain. Start with assembly processes and high-risk, custom components. Options include postponement manufacturing, strategic material at low-cost points, and increased information velocity regarding demand changes. | II. At a minimum, you should try to stretch quoted lead-times to cover the time it takes to convert components into products (i.e. a build to order process). Ideally, you would be able to cover some high-risk, custom components also. |
| Low | III. Forecast conservatively and prepare supply chain for baseline of business. Once forecast is consumed with real demand, begin stretching lead-time and availability. | IV. Stretch lead-times to customer in order to cover most of your total lead-time (i.e. a “buy and build to order” process). Let the customer share the risk with you. You may be able to use lead-times to move customers to more mainstream products. |
In many companies, there is a broad effort to reduce lead-times and cycle times. By considering the gap between customer lead-times and total lead-time, you can begin to tailor your efforts to where you can have the greatest impact. Based on the matrix you can see how the strategy differs depending on the situation. Taking a broad-brush approach may distract you from the biggest opportunities to reduce inventory exposure and you may miss the chance to let your customer share in some of the risk.
Managing inventory exposure in creative ways is one our areas of focus at Symphony. If you have questions on this topic, we would welcome the dialogue.