Lead Time Management: Private and Public Sector Practices

Abstract

Lead Time Management: Private and Public Sector Practices Lead time management is an important element in any materials management system. The length and variance in procurement lead time directly impacts inventory investment, demand forecast accuracy, inventory turbulence, the risk of unneeded inventories, and system responsiveness. The critical significance of lead time management, however, typically is not adequately appreciated or considered in basic Department of Defense (DOD) procurement and inventory management processes. As a result, DOD inventories relative to demand have increased, and unusable inventories continue to grow. In comparison with the DOD, leading private sector firms recognize the importance of lead time management to profitability and long-term market success. Typically they place a much a greater emphasis on time-sensitive procurement and materials management systems; in recent years, the just-in-time concept has facilitated this effort. The inherent nature of these strategies mandates active lead time management. This article examines lead time management in both the DOD and private sector environments. Drawing on data collected from private sector firms, DOD vendors, and DOD inventory managers, empirical differences in lead time profiles are developed and analyzed - and specific procurement lead time differences are developed and used to illustrate the impact on inventory investment. Finally, the article highlights DOD procurement and inventory management policies that negatively impact procurement lead times and recommends revisions to these policies. BACKGROUND In a recent article, George Stark argues that time represents the next competitive battleground in the international marketplace.(1) Further, he notes that Japanese firms have already begun to emphasize time management in the responsiveness and flexibility of their operating systems and corporate strategies. A key element of any procurement and inventory management system is effective lead time management. Procurement lead time is defined as the time required to acquire material for inventory - and is typically measured from the point in time when the requirement is identified until the time that a significant portion of the required material is delivered. Procurement lead time has two separate components - administrative lead time and production lead time. Administrative lead time is the time from the identification of a material requirement until the award of a contract for the requirement. Production lead time is the time from contract award for the requirement until the material is delivered. Most of the recent policy initiatives in DOD acquisition, including the Competition in Contracting Act (CICA) implemented in 1985, have tended to focus almost exclusively on specific deficiencies and operating problems in the basic procurement process viewed in isolation. The negative impact of these acquisition initiatives on other elements of the DOD logistics system, and on total long-term cost to the taxpayer, has received much less attention. Further, when viewed in the context of the significant revolution in logistics management strategy that has occurred in the private sector during the 1980s, these initiatives are, in large part, moving DOD in a direction that is essentially opposite to that of most successful private sector logistics systems. In these systems, horizontal management philosophies, with joint goal-setting and performance measurement across functions along with active lead time management, have become a standard. As DOD lead times increase, inventory managers often seek to compensate by increasing the investment in safety levels and to reduce workload by increasing order quantities for inventory replenishment. However, with increasing lead times, the risks of higher safety levels and larger order quantities are more substantial because demand forecasting is typically less accurate. …