Welcome back to the second part of our BLOG about the importance of delivery times!
Last week we talked about how complicated it actually is to have your supplier management under control. We mentioned some potential dangers of failing at it, and finished off by explaining how what we call “delivery time” is actually just a step of something called “the replenishment lead time” (RLT). If you have not read that one go and check it out here. If you did... let’s dive right in!
So what exactly is the replenishment lead time? SAP´s definition says: “ is the duration in working days sufficient to procure or produce any (reasonable) quantity of a material. ... For materials procured externally, the replenishment lead time equals the processing time required by the purchasing department plus the planned delivery time and goods receipt processing time.
Generally speaking, you could think of it as the time that passes from the time you place an order (order intake) until the material is actually available to you. Not until the supplier arrives at your premises, not until the materials are standing IN your warehouse waiting to be inspected or organized, and not until they are not already visible in your system.
Alright, now that that’s out of the way, how can you calculate the RLT if it entails so many little steps?
A couple of important things that you have to bear in mind are:
If you want to know the RLT for a new supplier or one you have only worked with a few times, it will be a lot more imprecise. In those cases, you will have to work with the information the supplier gives you and/or estimated values.
Even if you have worked with a supplier for a long time, which means you can use the information from your previous order transactions, it could still not be as accurate. You have to remember that if your supplier delivered within 4 days a few years ago and now takes between 7 and 8 days, you can't just take all that data and go on with a nice average. Older data would have to be "discounted" accordingly" , i.e., it may not carry as much weight because the data is old. So, it most likely no longer reflects the current state (consistency must be considered). Imagine explaining the current state of the world to an alien and using just the immediate data. Remember how the world looked like 2 months ago… just before the 2nd lockdown, or a year ago …? The best way to account for these differences or discounts is to use the right statistical method depending on your case.
In most of the companies ERP-System (if you use SAP, NAV or SAGE this is very likely your case) the RLT is a simple Input-Field filled “by hand” by someone in the purchasing department as you start a business with a new supplier. Keep in mind, that at this point you had no data about the supplier, so this information is nothing more than a (hopefully) “educated guess” of how long it will probably take. The dangerous thing about it is that all the fancy planning and forecasting algorithms and calculations for your production (staffing, machine utilization, etc.) done by the ERP are based on this “educated guess”.
Now that you know that, these are the factors that influence your RLT and therefore the ones you will need in order to calculate it:
Procurement preparation:this will likely look different depending on your enterprise, but think about all that has to be ready in order to start with the procedure. Determine what material or materials you need to order, how much and from which supplier. Take into consideration your internal processes and possible bureaucracy that has to happen before the purchasing department can finally place the order.
Your supplier’s production time: does your supplier have the materials on stock or does it need to produce or manufacture them before delivering them to you? Has been your supplier trustworthy in the past? These are the kinds of questions that you have to consider for this step.
Quality inspections: This goes both for the supplier and for your enterprise. However, since you do not have detailed information about the supplier’s internal processes you will normally only have data on the “production” and “delivery” times to work with. BUT you can go deep into your own incoming goods' inspection processes not only to have data to work with but to be able to optimize those steps.
Replenishment lead time
Goods receipt processing
Do not panic! We did not forget to explain the last two factors that influence your RTL.
But, since we do not want to overwhelm or bore anyone with what is a crucial topic in the road of optimization, we will leave you with this information as the food for thought for this week.
Make sure to come back next week for more details on the Transportation time and Goods receipt processing. But of course, that is not all, we will be talking about some benefits your company will enjoy once you begin to implement this new knowledge and what is very exciting is that we will be giving you *bonus tips*.
You are not going to want to miss those! These tips will allow you to go even further with the RLT and to have your procurement running like butter.