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Topic Title: Are Lead-time metrics and Inventory Turns metric basically the same thing?
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Created On: 10/11/2011 03:01 PM
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10/11/2011 03:02 PM
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Steve24
Steve Howell



Are Lead-time metrics and Inventory Turn metrics basically the same thing?

In terms of measuring overall process improvements, what is the advantage of one over the other?
10/12/2011 02:53 PM
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MarkRosenthal
Mark Rosenthal



Lead time and physical inventory turns (slightly different from your accounting inventory turns) are, indeed, the inverse of one another.

What helps is to translate any requirement in one into the impact on the other.

"We need to get to four inventory turns."
"OK, so to do that, we need to cut our total flow time from six months to three - which means three months is our target for dock-to-dock flow time. What would it take to get there?"

In general, lead times are easier for people who are engaged in day to day operations to grasp, because they can see when things are moving, and when they are not.
10/12/2011 02:53 PM
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Don_Guild
Don Guild



Inventory turns and lead times are similar, but not quite the same.

Inventory turns are usually calculated by dividing the cost of goods sold over some period by the total dollar value of the inventory (raw material, work in process, and finished goods).

If the inventory is more heavily weighted to raw materials, this may not be an accurate reflection of lead time. This is because cost of goods sold contains fully-absorbed overhead, while only the finished goods portion of the inventory is fully absorbed. So, you're dividing apples by oranges.

However, if you divide just the purchased material content of total inventory by just the purchased material content of cost of goods sold, you get the average door-to-door lead time. This is a better measure of material flow, and therefore process improvements.
10/12/2011 02:53 PM
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Boeing_Lean
Ken Hunt



Steve,

They are not the same. Lead time is the time from customer request of a product or service to delivery of that product or service ( ALL process steps included). Inventory turns relate to part of the overall Lead time.

As for measuring process improvements, I would submit that they are equally important, as they are both part of the overall value stream.

Ken
10/12/2011 02:53 PM
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leverwjc
Bill Curran



Steve,

Lead time typically refers to the time a company needs to respond to a customer order. Cycle time typically refers to the length of time a company holds inventory. Inventory turns are the recipocal of cycle time.

If you are turning your inventory 3 times a year, then it is taking you about 4 months to buy, convert and ship product. If your lean initiatives improve your velocity through the system and you can get to let's say 12 turns a year, then your average cycle time drops to 4-5 weeks. The higher you can make your turns, the shorter your cycle time will be. As cycle time drops, you will also notice that your On Time Shipping performance will improve, customer "lead times" will reduce, responsiveness to changing market conditions will improve, quality will improve, operating costs (especially overtime) will reduce, working capital will improve and everybody will be a lot happier!

Beware; there are many ways to calculate inventory turns. I have found that the most accurate way is consider ONLY material cost! Consider this equation:

Material component of what has been SHIPPED in the period / average value of inventory at material standard!

Good question. Good luck on your lean journey.

Bill Curran
10/13/2011 03:43 PM
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3744
Ronald Turkett



Using only material cost may be easier and may be a good estimate but it is not always the most accurate. Material cost is appropriate for raw material and in transit inventory but when it is in process or in finished goods the value added costs should be included.

Cycle time is usually considered as the process time to complete one product. Actual or effective cycle time is process cycle time adjusted to the operational availability and quality rate. Process cycle time sets the capacity. Hours worked, OA and FTQ affect the throughput. For example, machine cycle time may be 60 seconds but with 85% OA and 95% FTQ the effective cycle time is 74 seconds.

Experience has shown that reduction in inventory is usually accompanied by On Time shipping performance improvement but that is the result of improving all processes including production planning and control and logistics.

Ron Turkett
10/14/2011 10:16 AM
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Don_Guild
Don Guild



Because Steve was comparing lead time with inventory turns, I assumed that by lead time he meant the elapsed time from receipt of raw material to shipment to the customer. On the other hand, lead time to the customer is a factor of both dock-to-dock lead time and the locations of supermarkets in the value stream.

To illustrate the distortion of inventory turns vs. lead times, I have attached a link to a small spreadsheet that shows a sample calculation of total lead time and inventory turns. The assumption in the example is that the material, labor and overhead components of COGS are equal, and that work in process is, on average, 50% complete and therefore contains only 50% of its eventual finished labor and overhead.

Admittedly, the inventory in the sample is heavily loaded towards raw material to dramatize my point, but the logic still applies in any case. As you can see, inventory turns are 1.85 turns per month, but that does not equate to a lead time of .54 months (1/1.85). The average dock-to-dock lead time is actually 1.13 months! This is why I believe that lead time is a better measure of material flow than inventory turns.

inventory_turns_vs_lead_times.xls
10/21/2011 08:52 AM
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MarshallAndrews
Marshall Andrews



Steve, I would support Ken's position that both are important, but for slightly different reasons. Lead time is key for your team doing the work to improve cost and throughput. They will need to do the lead time analysis to understand where the problems are, and what to improve. It is a fundamental tool for improvement.
However, in my experience, it is not a credible measure to demonstrate improvement - it is too easily manipulated. Inventory turns are calculated by every company every month, and are truly the "tale of the tape". And if you want to sell your leadership on your improvements, they will need to show in inventory turns.
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