The ManufacturingCritical-Path Time shows that there is space for improvement in reducing leadtime. Lead time reduction has two main benefits for both companies: it reducesoverall costs and increases service level to final customers, which will resultin higher profits and more business opportunities in the future. Based on Suri (2010),costs incurred due to a long lead-time supplier are not only related to thequoted price in the contract. Costs such as inventory costs, to protect againstunexpected demand changes; obsolescence cost in all locations, due tounexpected design changes in the product or quality problems in an item thatneeds to be scrapped; and significant lost sales opportunities, due to unavailabilityof some long lead-time raw components.
These costs are valorized in thissection by calculating the supply-demand mismatch cost. Other costs are also incurredbut not considered in the analysis, such as freight costs for rush shipments ifinventory runs out. Sometimes, Flextronics and DePuy Synthes incurred in airshipments costs when there is an important order to fulfill and it was notready when the customer wanted. Another important cost is the personnel time.For instance, purchasing staff needs to communicate more frequently with thesupplier to follow up the status of a single order due to a long lead time.Planning employees need to spend more time in forecast changes and schedulechanges during this period, and communicate frequently to ask for rush shipments.
The supply-demand mismatchcost represents the value that the company is willing to pay to reduce oreliminate demand-volatility exposure. It considers thecost of overstock, when demand is lower that the order placed in advance so thecompany needs to hold stock and eventually assumes a cost of obsolescence; andcost of stocking out, when demand is higher than the order and the company incurin a backorder penalty and / or lost sales.When demand is not deterministic, mismatch costis calculated by adding the expected cost of stocking out when expected demandis greater than expected sales, and the expected cost of overstock when orderquantity is greater than expected sales. The mismatch cost within thereplenishment lead-time