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• #45413

Picklyk
Participant

I just had a quick question for you that I hope you may be able to answer. I am trying to figure out how lead-time contributes to total annual cost. I believe it has something to do with safety stock, but I’m not sure where to go from there. Is there an actual formula that helps to find a dollar and cents answer to how lead-time contributes to cost?

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#148403

jtomac01
Participant

You can look at it like this:
Lead Time = Processing Time + Waiting (Queue) Time + Conveyance Time
Next figure your cost for processing (by lot, machine time cost e.g.), time the inventory sits in queue (inventory cost e.g.) & conveyance (driver hourly rate e.g.)

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#148591

Tobias
Member

What you can consider is using NPV (Net Present Value) of the material that has lead-time. Consider that if lead-time was infinite small you would not need to tie up money to cover the lead-time of the material,  and the longer the lead-time the higher the NPV. Talk with your controller/accountant and (s)he can help you do the calculation if that is an issue.

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#148601

Rogers
Participant

Leadtime drives cost, both above the waterline and hidden factory.  First of all, inventory levels must cover the leadtime.  For example, if intransit (from shipment to delivery) leadtime from a supplier to a customer is based on ocean freight you automatically have to cover 30 days of production schedules with available inventory.  On the other hand, if the transit leadtime is via air freight or a short geographical distance the available inventory is a factor of production schedules vs. transit time.  With the need to maintain higher inventories you also have to allow for storage of those inventories.  There is cost, both real and opportunity, when you have to allocate floor space to inventory vs. using it for production.  From a hidden factory standpoint you have to consider the amount of inventory tied up that could become non-usuable if a quality problem is discovered or if your customer is driving a change to the product.  Now you have inventory that has to be re-worked, scrapped, returned, etc.  This is the chance you take when long leadtimes drive inventory.  This is also true if the leadtime is a product of throughput time in the factory- in process stock will create the same costs as described with my intransit examples.  Hope this helps!

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