Tuesday, September 24, 2013

Reducing Lead-Time and Production Near the Market

One of the main issues discussed in Capgemini’s “2016 Future Supply Chain” report is the impact of lead-time reduction on improving supply chain networks. In a perfect world, lead-time of a supply chain would be zero; orders are being filled instantly, thus there is no inventory. If it was the perfect world, the business would need no warehouse to keep the inventory, no staff to transport the products to warehouses, thus less costs.  However, the real world is not perfect, and the lead-time is not zero. Thus reducing lead-time in product replacement plays a crucial role in improving supply chain networks.

The importance of reducing lead-time comes from the ability to answer the market demand on time. When a business minimizes the lead-time, the time from the production of a good until the customer gets it decreases. In this way, market responsiveness increases along with the shelf availability of the product.

While in today’s world, it is considered that moving production to China is the best way to improve the lead-time by lowering costs; there are many ways to do so. Simplifying the infrastructure and reducing inventory are some of them. Another way is to redesign the existing products and to provide direct supply from the production. K’Nex is one of the few companies that have recently brought production back to US. [1] Their main reason to do so is the market responsiveness; when the production is physically closer to the market, it is easier to reduce the lead-time, thus answer the demand faster. 

While the market demand was an important factor for K’Nex to move back to US, costs associates with the production were a challenge at first. At that point, they redesigned the products to reduce the labor requirements and the lead-time. Despite the challenges, K’Nex strategy to moving the production back to US and reducing lead-time is working quite well; the total employment rate has grown 30% over the last four years. But still, there is a long way to go; while moving the production closer to the market can decrease the lead-time, the suppliers of the production are not moving with the business. Hence, the future supply chain is more of a balance between the production and the supply. So, would we see any more business bringing their productions closer to the markets along with the suppliers, or would suppliers stay where the labor is cheaper?

1- “K'Nex Sees Opportunity for Faster Responsiveness, but there are Challenges; Finding Suppliers is Hard” http://www.scdigest.com/ontarget/13-03-12-2.php?cid=6821

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