Our CEO Renaud Anjoran delves into lead time reduction strategies and more with Adrian from the team.
We talk about why reducing lead times is an important goal for importers, what benefits you can expect to enjoy, the different causes of lead time delays, and a number of actionable lead time reduction strategies you can take away from this episode and implement in order to receive your products faster from suppliers.
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Today we’re talking about how to reduce lead times from your suppliers in China or Asia.
First, is there any news on the COVID situation in South China yet?
Yeah, not much has changed since the last episode, not much news, but the situation in South China is under very close scrutiny and it was planned already to last probably at least two weeks. I mean we know they need to keep looking carefully because there’s been some suspicion and some risks of fast-spreading variants here. So yeah some areas of Guangzhou are blocked so, for example, we have one of our technicians lives there, so, unfortunately, he’s not stuck in his home but he cannot really get back there so he simply stays in hotels. Right okay, well it’s not going to last forever. No, it has a little bit of an impact sending the staff to do the testing regularly, but that’s fine. For people who really want to go into China at this time, if they don’t already have a work visa, the right kind of vaccine, and everything, it seems like it’s pretty hard to get the letters, these special administrative steps, it seems to be a little bit harder for them to get in China now, and it was already pretty hard. And for people who want to travel within China, they might be the most impacted, so if we have someone saying in Shanghai or in Xiamen and they have to go to a job in somewhere in Shenzhen, Guangzhou, in Foshan and Huizhou, and so on, they really don’t want to go because they can go there, but they can’t really go back. I mean when they go back they will have to stay in quarantine and everything, so it’s not fun, and even if today their local government says ‘yeah no problem’ well who knows by the time they come back? The rules change all the time, so let’s see. I mean, with their methods they will get over it, I’m not so worried.
Okay, yeah, well speaking about the Covid situation in China is actually relevant to the topic at hand today, because as we’ve also discussed in other podcasts and written content that we’ve put out on Sofeast’s blog, for example, the localized lockdowns and outbreaks that have happened for example at Yantian port in Shenzhen which is one of the major ports in South China this has caused delays this has caused expanded lead times from suppliers in China or other places in Asia which have also suffered from outbreaks like in Vietnam, for example, I suppose, so there’s definitely a good link there and so I think it’s quite a relevant topic to cover today.
In general terms, why should we always be striving to reduce our lead times?
Well, the longer the lead times to when you reorder your products, the more you have to rely on forecasts, and the more you rely on forecasts the more risk you have of making the wrong bet, right? So let’s say you you have one month of average sales quantity let’s say in your warehouse for a given product that maybe six weeks before you should already launch a reorder, and then you get it four weeks later and then if things go wrong, you still have a little bit of a safety net on average right if it’s a product that you can still afford to be out of stock for a few days right and in other cases, you absolutely need to keep a minimum safety stock and you should nearly never be out of stock, okay, then in that case obviously you need to take more margin of safety and you need to use some statistics to estimate the probability that you would be out of stock, right. So let’s say your tolerance for surprises, your tolerance for the probability of getting out of stock, for a certain product is one factor, another big factor is how long it takes you to reorder the same products and that’s the lead times. Basically, the total time to get a product from the issuance of a purchase order from your side to the products arriving in your warehouse in your distribution center, in your stores, wherever it really counts and, as you say, Covid is very relevant because in 2017, 18, 19, in a lot of product categories there were not many surprises. There was like ‘okay, we have this model and then most of the time it would be okay if we follow this sort of decision model and we will usually get the products on time and we won’t run out of inventory too badly and then even that we have continuity of supply we can keep supporting our customers.’ That’s great when the environment is stable, but then when the environment is unstable like we’ve seen over the past 18 months well all of a sudden you can’t really count much on your forecasts because maybe your sales will dry up, maybe you will sell everything in the next three days, and maybe your suppliers themselves will have trouble if, for example, these days you want to order electronic products and some of the components are out of stock or their price went 5x or 10x you might have a problem. This is going to impact you if you were selling face masks in March of 2020 your stock would disappear pretty fast if it’s on Amazon, boom bye-bye, it gets sold out very fast, yeah, so this is the unpredictability of demand and supply that make the whole forecasting exercise much more difficult with lower accuracy.
So when you cannot have a very accurate forecast, then the one thing you really start to look at very carefully is the lead times. If it takes you forever to get your products you’re very reliant on your forecast, but if you cannot rely on your forecast then you’re going to be out of luck more of the time and that is a big problem, so that’s why you need to reduce lead times.
Another big why is if, let’s say you are in the UK, and you have two sources for a product, let’s see you have one source in Shenzhen and then you have another source in Warsaw in Poland. Well, the one in Shenzhen might take you 60 days, 70 days, 80 days, to get the product. Well, that’s your lead time, but maybe if you order from your supplier in Poland and maybe it doesn’t have to be a full container maybe they can send five cubic meters of product, let’s say, and it’s economically okay, maybe they can make these products in 10 days maybe they already had a few raw materials in stock, just enough to make that when you need it, and then they put it on a truck and you get it just a few days later that can be five times faster or even more so that makes a huge difference on the amount of inventory that you need to carry so that’s the second big reason why reducing the lead times comes with a lot of benefits.
Lower inventory means lower cash tied in working capital that maybe you need to borrow it at 10 12 a year interest rate or sometimes even more, and then if you’re in the fashion business, wow, it’s even more important because you have your new style and you put it on the shelf or the beginning of the season and then you see it sells very well, maybe you don’t have the time to reorder the same. If you re-order the whole cycle is 45 days to shipment plus 35 days to get it over and so on and then the season is over so you just have one shot and similarly, if it doesn’t sell well, you had to purchase a higher quantity than you would like with high uncertainty so that leads at the same time to some inventory that you need to liquidate because you could not sell it and also some customers maybe came to your shops and could not find something they liked, but if lead times were shorter they would have seen the one they like because you would have time to reorder it, right.
So lost sales are also expensive so that’s why a lot of companies look into what to do to get the lead times down, because really when you add everything up from when you issue the PO to when you receive the products it might be a very long time, shockingly long sometimes, yeah, and even worse these days as well, so it depends if you are in one of the hot categories like e-bikes or some gym equipment or some electronics as I mentioned, well, yeah, you are of luck. It’s somewhere in the supply chain where there’s sort of a bottleneck things really slow down and then you are impacted because your lead time your total time is going to go up. At the same time if you buy from a factory that’s not very busy and none of the materials or components or accessories that make up the product are in short supply, well, it might actually be faster than usual, but maybe not by much.
Okay, interesting, well you mentioned an interesting sentence just then you said ‘that’s why everybody’s looking to reduce lead times.’ Before we go into your strategies of how to reduce lead times, it’s probably going to be very very helpful to talk about some of the common causes.
The first thing you want to look at is where is the manufacturing taking place and you need also to have an idea about not only your tier one supplier, the one that sells to you, but also maybe tier two, tier three at least for the critical components that might run into short supply that might be custom-made and this understanding first will explain a lot of things. So if you buy from a factory in China let’s say or let’s say you buy from Vietnam. Okay let’s make it interesting, you buy a finished product from a factory in Vietnam and let’s say it’s some kind of power tool, maybe an electrical screwdriver, and typically this is made in China, but a lot of this has moved recently and you buy it from Vietnam now. Most of the components will still come from China probably right so you’re still depending on the Chinese supply chain and maybe there’s one key component also that comes from Taiwan, from Malaysia, from Japan, or another country. You should have an idea about all these things even if you don’t know the identity of these sub-suppliers and you need to have an idea at least, so what I mean is that having an idea of where manufacturing takes place on the map then based on that there are some obvious issues, right: transportation. So, when you place the PO and the factory in Vietnam doesn’t have everything already in their warehouse all the components and they also need to place a PO to their sources in Mainland China and these sources maybe need to order the Japan-made component, let’s see, okay, or maybe they have it in inventory most of the time, maybe you can count on the fact that they have it in inventory, let’s say they have everything in inventory in South China in Guangzhou. Okay great, then they’re gonna waste a few days maybe in paperwork and confirmation and payments and then it’s going to get on the truck and then in a couple of days it will be at the factory ready to be assembled, then what happens? There’s incoming quality control, there’s always waiting a little bit because they have a plan for assembly so it’s not like they have a slot right away, then it goes into assembly and the lines. How long is it gonna take? Well, if you order two thousand pieces it’s gonna be faster than if you order 50,000 pieces at a time, right? So this has an impact and then the testing, the outgoing QC, export declaration, waiting a little bit, getting a container which is a problem these days, getting a space on the boat, and then, if it’s sent by sea doing the whole voyage to where it’s going to be delivered and get out of customs and get on a truck and so on. That’s how you get to maybe you place the PO then you wait for 40 days and then you wait for another 35 days and add a couple of extra days and then it’s in a warehouse where you can actually start to put your hands on the product, well, that’s 80 days roughly right? That’s a long time.
Let’s say if you’re in Birmingham in the UK, a lot of this will be slashed if all the components are made in, say, in Germany, the Czech Republic, and Poland. All of this gets on the truck, gets to Poland, gets assembled then since you don’t need containers you can order more, often it means the batch will be smaller, and then you get the products and again just a few days on a truck and if it’s not good you could send it back. Now let’s say you’re not in London, maybe now with the UK getting on its own I’m not sure it’s the best example, but let’s say you’re in Copenhagen. You get the products and if it’s not good probably you can just put them back on the truck and send it to them and get it back a few days later. If there’s a mistake in assembly, just need to disassemble, rework, reassemble, repack, and ship to you and it’s much smoother than in China. The big extra problem with China or Vietnam is if they make it wrong it takes forever to send it back and if it’s declared as defective products it might actually be impossible to send it back to China as they make it very very difficult. In Vietnam actually, I don’t even know.
Because they’re worried about foreign waste coming in?
Partly yeah totally true. I mean basically, China does not have a return policy! I mean there are ways around it right like in the Shenzhen free trade zone it’s possible to do a little bit of rework and things like that without importing the products and then you ship them out again, but still, it takes forever to send it back, get it reprocessed and send it again.
So that’s the big thing, right. Geographically where is it located, what does your supply chain look like when you look at tier 1, tier 2, tier 3, and what is the size of your batches and also what is the risk that you get something that you cannot use and you need to send it back? What is the risk that the lead time at the last minute balloons, more than doubles maybe right, or you can’t even send it back, you need to reorder once again? That’s a big problem.
There are some other causes:
Poor communication by some suppliers definitely slow things down sometimes.
How long is it going to take to be processed that’s for sure. Maybe they’re very busy, maybe the way they are organized in production is very batch and queue and batch and queue and batch and queue the different processes are not linked at all and you go to their factory and it’s more a warehouse than a factory and there are piles of materials everywhere and you can’t even see the people or the machines! That’s the sign of a very slow manufacturer right, and then sometimes you look at the piles of products, you run your finger on it and it’s full of dust, like how long has this been here? So yeah, that’s a big topic: how much inventory they keep. Also I kind of mentioned that, but if they want to be themselves on the safe side or maybe they do a VMI vendor management inventory with some of their suppliers. or their suppliers are just next to them and very reactive, all of this makes a big difference because a lot of the time is spent just waiting for materials and some of them you order them and you get them the next day, but some of them have to be custom made and some products have a billion material of 50 lines 100 lines or more and when you start to have a lot of types of components if one of them is late you can start right that’s in many cases. So that is also a big cause of not only longer times but also let’s say inconsistently long lead times and that is a big problem when you really need it and they say ‘we have a little problem here and it’s gonna be a bit slower’ and then they don’t say anything and then are supposed to ship on 25 June and on 20 June they tell you ‘we’re gonna be a week late because we haven’t started doing the assembly yet’ and when they tell you they’re going to be one week late it means at least one week and then later they say ‘oh another five days,’ etc.
These the main causes of longer lead times that come to my mind.
Sure, those are good. So that’s diagnosing the symptoms of the times that are too long, so with those in mind then for everybody who’s listening, what are your key strategies for actually reducing your lead times then?
So you need to take your products or maybe your markets and put them on a sort of a two by two chart and you say okay which ones are very stable, the demand is relatively stable, we can forecast relatively well, so we can live with a long lead time, and that stuff you can have it made in Asia and you’re not gonna try to go with all kinds of strategies to keep the lead time very short, as it’s not that critical. Then some of your customers or your products will be very time-sensitive, just like the example I said before, you sell fashion products, you have a new style for this collection and when the season starts you need to be able to reorder and get it shipped really fast, then based on that you structure your supply chain the right way.
A few years ago I was listening to a presentation in a conference in Hong Kong by someone from The Gap the clothing company and they really did a two by two chart and they say well these are like the white t-shirt and things like that it’s fine we’re going to be okay even if we stop with a little bit too much inventory it’s fine we will sell it, and then there was the other extreme, the fashion products where timelines are very very sensitive and then based on that they say well if the market is North America and timing is sensitive I want to have it made in Honduras let’s say or maybe the first batch which is not very time-sensitive can be planned in advance can be sewn in Bangladesh, but then for the reorder I need everything to be ready to launch production in Honduras if necessary, right? Then you can really break down the steps to make this batch of whatever, of fashion shirts: We need to have the yarn, okay, and the yarn doesn’t have to be dyed yet so it can be grade yarn as they say, and we can already work with our suppliers so they have that in stock and then sort of at the last moment we will tell them well you will use this yarn to make these products in that color, because that’s what’s selling well and we dropped the plan to make that other one, it’s not going to work because the market is not really loving it, right, so in doing that you have a lot of extra flexibility.
That’s one thing really, sitting down and doing an analysis of how to structure your supply chain and how to work with the different suppliers, because when you look at the case that I just mentioned, so you work directly with the fabric for the fabric supplier, not the garment factory, but the fabric supplier, you need to make sure that they have this kind of yarn available and that after that they can have it dyed pretty fast and shipped to the right cut and sew factory, and in the cut and sew factory what you do is you reserve some of the time and some of their lines and then, as late as possible, you tell them what the plan is and they’re gonna get the fabric that they need and so on and so forth, and that takes quite a bit of work, but there’s a number of fashion companies that have done that. I mean obviously you can also put everything in a plane but it’s not very friendly to the environment and it’s not sustainable is it?
Okay, so that’s really working on the structure of the supply chain. Another way, if you work closely with the manufacturer and if you are their main customer or let’s say you’re one of their biggest customers, you can sit down with them and say ‘okay so why does it take you 45 days to have that made or 50 days or whatever?’
I remember an extreme case of a factory that was making axles for cars, but for the aftermarket segment and these guys were doing the diecasting and they were doing a lot of the machining because there was a lot of machines involved and after that, they were doing the assembly together and putting degrees and things like that and they were very late in shipping to their customers, but we looked at all the inventory that they had of working process material and the time that it takes them to process everything and basically something that starts at the die-casting stage will be a finished product in a box something like five months later, so sometimes it really gets extreme, and I say five months, but it might have been six to seven months, it was just insane! So in such a case, what you do is you sit down your supplier and say ‘okay first the planning system. How do you plan?’ They might say: ‘Oh, well we do like this, but it’s not very structured and it changes all the time because the customers say oh this is very urgent you have to push it and then it makes things even more complicated because the plan keeps changing.’
That in itself will make everything less efficient and will reduce the capacity of the factory and it means that they will be slower in making your orders so you need them to actually have a good planning system in place that doesn’t get interrupted all the time that can just set the plan and then within a bit of flexibility have it done per the plan so that you maximize the efficiencies and also you don’t tell the customers at the last minute that is going to be late so you already know what’s going to be shipped and when.
Also, work on the batch sizes. Sometimes there’s really no reason to place very large orders now. Some people, and that that’s very very true in China, say ‘well I need to buy that specific kind of stainless steel and the price goes up goes down a little bit and I’m waiting a little bit and then because I know when I order a very large quantity I can negotiate a discount with the supplier.’ So it pushes them to focus on the volumes the biggest batch at the same time, but then as I mentioned if you make a huge batch everything is slower! It gets slower to get from materials to finished products, so that is a behavior that their purchasers need to stop because just to earn an extra, I don’t know, two per cent discount on what they buy it kills their own working capital and it takes a lot of space and it makes a lot of things inefficient also on their side. Of course, they also need a bigger warehouse, they need more people to move stuff around, if there’s a quality problem, but they’ve already semi-processed forty thousand pieces that is a lot and there’s a very big problem very quickly. You need to basically push them to reduce the working process inventory so there are ways to do that. You link the processes closer to each other and you try to minimize the ‘just in case I push everything I can to the next process’ kind of mindset.
When you do that you need to explain it to them and most of them will not understand it because people just assume that when you make a huge batch you maximize all the efficiencies. Your machines never have to be down, never has to be set up or anything, the people don’t have to think too much when you get it right at the beginning you will keep getting it right so quality will be great. They have this kind of mindset and it’s actually the opposite. The best manufacturers now want to be lean, because it comes with better quality and lower costs as well as much shorter lead times.
But yeah, most people don’t really understand why, and it’s not easy to make them grasp why. Also, why do they say for example 50 days, but actually when you put things on them in an excel file it should be only 35 days? Well, quality issues happen, maybe they receive components from their suppliers and sometimes they have to reject maybe sometimes they don’t really pay attention to it, it goes into production, and then the production staff was to sort them out. I mean this is a very bad thing to have production staff do and obviously it impacts their efficiencies, slows things down, and sometimes they cause quality issues, and it needs to be reworked so that’s disasters, right. That’s why they say okay just in case we do everything with more inventory, just in case it could be 45 days, but we say 50 days just in case. So they go with this ‘just in case thinking’ because they know that they have a lot of nasty surprises, so one kind of nasty surprise is quality issues, another one is equipment going down, but why does the equipment go down unexpectedly? Because they are not good at preventive maintenance. Okay, so they’re not good at quality or their supplies not good. Quality, boom, that’s a problem. No good preventive maintenance, boom, that’s a problem. Maybe some of their staff are not stable. They might have 10 people leave next week and they don’t even know about it, well right there management of the people. Get them trained, make sure they’re okay, don’t kill them with ‘oh we need to ship everything by tomorrow morning, so just keep working through the night, and, oh there’s no Sunday off, we have to work guys, yeah yeah yeah you will get paid extra, don’t worry just keep working, and it’s fine you will have a day of rest next weekend hopefully.’ Okay, so that’s illegal and you lose some of your best staff because people don’t put up with that for years and years so again, not sustainable, right?
So all of that was really working with your supplier, getting into their processes, into their planning systems, so it’s not just about the manufacturing side, it’s really also a lot on their supply chain side not ordering too much and so on.
Another one is to get a better more accurate forecast. Maybe you need to work closely with your key customers to get some indications earlier that you need to reorder, or maybe this one is not moving very fast right, and similarly, you could share that also with your key suppliers. You can give them a forecast. A forecast is not a purchase order, right, so some customers give for example a three-month forecast or even longer, and that’s a good thing because it means ‘okay the forecast shows that they’re gonna order, let’s order more inventory and let’s talk with our own suppliers to see what the issues may be and then, boom, I get the PO. I should not have a surprise, I should be kind of prepared.’
Obviously, the problem with forecasts is sometimes they’re kind of optimistic and you order a lot and then actually they say ‘well we’re way too optimistic sorry, something happened in our distribution channels, we dropped these guys because we couldn’t work with them, or whatever, so yeah sales are going to be a bit soft for the next six months, sorry.’ And then you’re stuck with a lot of inventory. So then what do you do? Do you keep the inventory, do you try to resell it if it’s not custom? That’s a big big issue and usually, the manufacturing contracts in that case will provide a way out. If the manufacturer cannot sell it then there should be a little bit of a penalty for the customer in that case right, it’s got to be fair.
So these are the big things that you can do to cut the lead times for your procurement.
Really good, and when you were listing all of the potential problems that you might come across there was one thought going to my mind and that was ‘the vetting of suppliers.’
Absolutely yeah, so when you vet a supplier you can see if they have a proper planning system. ‘You have an ERP, great, but do you just run your sales, your purchases, and your finance stuff in your ERP, or do you use the production control material control these kinds of modules? No, you don’t. Okay, so show me your planning system. Oh, it’s all in the head of the production manager?’
That already tells you something and there’s a lot of things you can do. Look for the bottlenecks in their internal operations and then you can sort of deduct if they only have five machines like this and then their maximum capacity per day is x right so that gives you an idea about their flexibility, and then you can have an idea of if they are already sort of at max capacity or if it would be easy for them to ramp up that capacity quickly if necessary and also to try to reduce work in process inventory or are they drowning in a sea of materials everywhere? These are some relatively simple topics that can be checked.
As soon as you send an auditor in they’re going to pull up a lot of this stuff?
Yeah if that’s the topic that he needs to focus on, yeah.
Okay, great, well that’s some great advice for anybody listening who is sort of dissatisfied with their lead times at the moment and there’s a lot to think about there so thank you.
Related content where you can learn more about what affects lead times and reducing them…
- How to reduce lead times
- Better sales forecasts and more flexible supply chains
- Production in large batches in China: top 5 problems
- Manufacturing Issues Communication Problems With Chinese Suppliers Cause And Their Solutions
- IFE (Initial Factory Evaluation) Audit
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