Critical-Path Time shows that there is space for improvement in reducing lead
time. Lead time reduction has two main benefits for both companies: it reduces
overall costs and increases service level to final customers, which will result
in 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 the
quoted price in the contract. Costs such as inventory costs, to protect against
unexpected demand changes; obsolescence cost in all locations, due to
unexpected design changes in the product or quality problems in an item that
needs to be scrapped; and significant lost sales opportunities, due to unavailability
of some long lead-time raw components. These costs are valorized in this
section by calculating the supply-demand mismatch cost.
Other costs are also incurred
but not considered in the analysis, such as freight costs for rush shipments if
inventory runs out. Sometimes, Flextronics and DePuy Synthes incurred in air
shipments costs when there is an important order to fulfill and it was not
ready when the customer wanted. Another important cost is the personnel time.
For instance, purchasing staff needs to communicate more frequently with the
supplier 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 schedule
changes during this period, and communicate frequently to ask for rush shipments.
The supply-demand mismatch
cost represents the value that the company is willing to pay to reduce or
eliminate demand-volatility exposure. It considers the
cost of overstock, when demand is lower that the order placed in advance so the
company needs to hold stock and eventually assumes a cost of obsolescence; and
cost of stocking out, when demand is higher than the order and the company incur
in a backorder penalty and / or lost sales.
When demand is not deterministic, mismatch cost
is calculated by adding the expected cost of stocking out when expected demand
is greater than expected sales, and the expected cost of overstock when order
quantity is greater than expected sales. The mismatch cost within the