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Lead Time reduction of raw material

Six Sigma – iSixSigma Forums Old Forums General Lead Time reduction of raw material

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  • #49640

    awatt
    Participant

    I am trying to calculate inventory savings if I reduce lead time for my raw material.  I have inventory cost for each month for 2007 along with consumption rates and piece price.  Say i have a part that has a 30 day lead time and I reduce it to 10 days, how do I calculate inventory savings accuratly?

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    #170114

    Irishman
    Participant

    Talk to your financial group / controller.  They will usually have a standard cost associated with carrying inventory.  It is normally a percentage of the total value of the inventory.  Typically it is between 5% and 10%.
    Example:  Using 10%:
    If you reduce your inventory by $100,000, and the reduction is permanent.  Then you can claim $10,000 in savings on inventory carrying cost.

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    #170115

    Chauhan
    Member

    Are you talking about reducing rawmaterial leadtime of procurement or reducing inventory days ?
    If it is former then you can verify sales increase as a direct relation to the lead time reduction .
    For example if the final product using the raw material x units is being sold per month , by reducing the leadtime how many more units can be sold per month and corresponding profit increase

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    #170127

    scoben
    Member

    The only real cost savings with reducing raw material lead times is a reduction in carrying costs if in fact you actually reduce the amount of inventory you are carrying. 
    I have never seen an increase in sales because the raw material lead time was shortened.  Purchase orders are placed based on sales volume, not the other way around. 
    Having said this I have seen sales volume decrease because inventories were lowered too much when lead times were shortened so it becomes critical that safety limits are properly set and monitored to ensure you are never short.  You also need to consider the other side of the cost coin here.  Some times decreasing inventory can lead to increases in other costs such as incoming nspection.  Example:  Assuming a standard AQL 1.0 SNLII sampling plan – If you receive a bulk shipment of 5,000 parts you would pull 200 samples and do the inspection once.  If you reduce the inventory and now start ordering 1,000 parts at a time, you have to pull 80 samples from each shipment.  By the time you purchase 5,000 parts you would now perform 5 inspections looking at 400 parts versus 1 inspection of 200 parts. 
    Reducing lead times and inventory is usually a good thing, but there is are a lot of downsides if not managed and understood correctly.  Just want to make sure you look at the full impact and all costs associated with the change.

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    #170128

    Rhineg
    Member

    During the period of your raw material lead-time, there is accumulating uncertainty about what real sales demand will be. That leads to safety stocks which represent over-investment in inventory (working capital). By reducing lead-time, you should be able to get your material planners to reduce the safety stocks, because there is a shorter period of uncertainty. That reduction in safety stocks translates to reduction in carrying cost for the inventory (financing the inventory + storage costs for the inventory).

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    #170191

    Swaggerty
    Participant

    Agree with all the points put above. the only addition that i have is that if you produce products with different specifications, lean is a gr8 way to handle things…Dell uses it all the time, and is a great way to minimize obsolete technology

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