Even marginal value of time is low

Evenif decision makers know that short lead times drives responsiveness, Fisher etal. (1997) demonstrates that companies attempt to quantify the impact of leadtime reduction with no success and have constraints to reduce their lead timesin practice.

To address the quantification of lead time reduction, Blackburn(2012) stated that marginal value of time is low for products with low forecastvariability, or predictable demand, and cost of overstock is limited to theinventory holding cost. In a broader way, de Treville et al. (2014b)proposed a quantitative model that demonstrated that marginal value is high andinvestments in lead time reduction are meaningful for products whose forecastevolves over time and demand volatility is high or stochastic; products thatare typically classified as innovative. However, de Treville et al. (2014a)applied this same model to products that were difficult to classify asfunctional or innovative, in three different industries, and demonstrated thatdepending on demand characteristics and the valuation of overstock costs, themismatch cost may be higher even for products that appear to be functional.

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 The cost-differential frontier model proposed by de Trevilleet al. (2014b), uses quantitative financial techniques to optimize sourcingdecision in face of demand risk. The frontier indicates the indifference of abuyer between a make-to-order policy and a long-lead time supplier. It showsthe cost differential required to compensate for an increase in demandvolatility exposure, from a make-to-order policy, by placing an order whendemand is known; to the longest lead time supplier, which in this case isFlextronics lead time. If the long-lead-time producer offers a cost that ischeaper than the make-to-order cost by a percentage that is greater than thecost-differential frontier, then the long-lead-time producer covers for thesupply-demand mismatch cost generated with the long lead time.

In the opposite,if this percentage is lower than the one in the cost-differential frontier, thesupply-demand mismatch cost is greater than the cost savings offered by thelong-lead time supplier. The cost-differential frontier is based on thenewsvendor model as the order quantity covering the replenishment lead time isthe one which maximizes profit. For an organization thatquantifies the value of lead time reduction and discovers that the cost ofhaving long lead times outweigh the cost of flexibility, the organization is expectedto align in five dimensions: strategy, processes, structure, rewards system,and people management (de Treville and Krishnamurthy, 2014c; Goldratt and Cox,1984; Schonberger, 1982; Suri, 1998; Suzaki, 1987). These five dimensions arementioned in the model developed by Galbraith (1995) called Star Model, wherehe stated that all five dimensions must be aligned to achieve its strategicobjective.

For an organization that is willing to reduce lead times andexploits the time-based strategy advantages, de Treville et al. (2012) createda model that states a positive relationship between the time-based strategy andprocess lead-time reduction, moderated by the organization’s structure, rewardssystem and people management.  Researchers show that whenan organization is willing to transform its business to pursue a time-basedstrategy, as being responsible to customers provides a clear competitiveadvantage that compensates for higher costs or production, the benefits can besubstantial (de Treville et al., 2014c). Suri (2010) demonstrates thatcompanies that have implemented QRM and cut their lead times by 80% or more,they can deliver to customers exactly the products they need, faster than anycompetitor in the market, at even a lower price and with incrementalimprovements in quality. 

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