The Role of Materials Management in Developing Time‐Based Competition

Time has been recognized as a critical element of competitiveness in global markets.|1~ A number of firms, including AT&T, General Electric, Hewlett Packard, Northern Telecom, Toyota, and Seiko, have all recognized the importance of shorter delivery lead times in providing a strategic advantage. The reduction of lead time within these firms has resulted in reduced product costs and increased market share in many global markets.|2~ Lead time is especially critical in industries faced with a "make-to-order" market. In this case, the organization manufactures each order on a unique basis or assembles a wide variety of finished goods from a smaller set of options. Since such products cannot be "pulled off the shelf," customers frequently request delivery as soon as the order can be produced. Managers in this situation are thus under pressure to reduce delivery lead time while dealing with all the complexities traditionally associated with a nonstandard product--larger inventories, more purchased parts, and a continually changing production process. As shown in Figure 1, the make-to-order process flow typically involves several stages, including new product and perhaps process design, demand management, engineering changes, purchasing, production, and testing. Faced with the problem of having to reduce lead time, it is often not clear in which stage of the cycle managers should focus their effort and capital. A typical approach is to try to reduce manufacturing lead times through new technology, extra capacity, or reduced setup times. In most processes, however, actual manufacturing time consumes less than one quarter of total lead time.|3~ This suggests that attempts at reducing total lead time through process time reduction does not address the real problem. This study provides some evidence of how materials managers can affect other segments of the make-to-order process in developing competitive time-based strategies. MEASURES OF LEAD TIME PERFORMANCE Over a period of five months, 35 firms across the United States and Canada were visited by the author, providing data on 46 independent product lines. These firms spanned a variety of make-to-order industries, including aeronautical equipment, computers and electronics, furniture, industrial equipment, plastics, telecommunications, and textiles. The sample included both large and small firms, in which annual sales varied from $300,000 to over $1.6 billion, with a mean of $233 million in sales per facility. Each of the firms visited was classified in terms of its ability to compete on the basis of reduced lead times. Because the firms were in different industries, a set of standard metrics that could be used in different environments was developed. The following measures were used to measure lead time performance: * The ratio of delivery lead time to dollar value-added * The ratio of total manufacturing lead time to total standard hours * A scale measure of lead time competitiveness vis-a-vis other firms in each industry The first measure reflects the relative magnitude of a firm's lead time with respect to its actual output in dollars. Differences in lead times between firms in different industries can be explained through the concept of value-added, an established measure of output. Value-added represents the "amount that purchased raw materials and components increase in value when they have been converted into the products of the business."|4~ Value-added is defined as the cost of purchased components subtracted from the total cost of the product (a unique figure for each industry). The second indicator of lead time gauges the extent to which the internal lead time associated with the primary activities of the firm is reduced. A theoretically ideal production system instantaneously converts raw materials to finished product, obviously a goal that is impossible. In any real production system, the minimum theoretical production system is the sum of the individual process times required to produce the customer order. …