Economic evaluation of leadtime reduction

Abstract

Many companies have systematically worked on controlling and reducing leadtimes and have achieved impressive improvements. Further reduction of leadtime by such companies can only be achieved by relatively expensive projects. In this paper the economic evaluation of such projects is discussed. Two important requirements for an economic evaluation of a project proposal for leadtime reduction are presented. The first requirement is to carefully analyse the consequences of leadtime reduction. A team that analyses the consequences should represent a variety of business functions, e.g. marketing, production, logistics and engineering. The second requirement is to use the right kind of economic criterion. This criterion should be based on future cash flows caused by the leadtime reduction. It will be demonstrated that product costs are inappropriate to evaluate the economic consequences of leadtime reduction. This suggests that a decision about leadtime reduction should be made at the organisational level where managers are responsible for profits, not just for product costs.