Skip navigation

In our ongoing discussion about reducing the “ToC Replenishment Time” as a factor in cutting away at the many troubles that afflict supply chains, we will continue to look at ways to reduce Production Lead Times (PLTs).


ToC ReplenishmentDays.jpg


Remember, the ToC Replenishment Time or Theory of Constraints Replenishment Time is the sum of the following factors:

  1. Order Lead Time (OLT)
  2. Transportation (or Shipping) Lead Time (TLT)
  3. Production Lead Time (PLT)


See the previous articles for more details.


More Ways to Reduce Production Lead TimeS (PLT)


We have already discussed two ways that supply chain participants who buy from manufacturers and assembly operations (without doing any manufacturing or assembly themselves) can contribute to reducing PLTs.


First we talked about how longer Order Lead Times (OLTs) contribute to longer Production Lead Times (PLTs). Next, we talked about how actions might be taken to reduce or eliminate policy-induced demand variability. So, what else can be done by supply chain executives and managers to aid in reducing PLTs?

  1. Place orders with the manufacturer every day reflecting actual demand. We already discussed this in conjunction with reducing OLTs and providing greater visibility of actual demand to the manufacturer, but it is worth reiterating here as a separate element in building the kind of supply chain agility that rapidly improves supply chain performance for all the participants in such a plan.    

  2. Disconnect the size of the replenishment order from pricing. Collaboratively work out agreements regarding long-term (six months or longer, where appropriate) purchase quantities and long-term pricing. This will add stability to your collaborative supply chain arrangements while allowing replenishment orders and transfer batch sizes to balance the flow (not the inventory) in the supply chain.    

  3. Reduce the size of transfer batches everywhere in the supply chain. Wherever possible, work collaboratively to reduce the size of transfer batches. The ideal—not achievable in all cases—would be to aim for transfer batches that approximate actual daily demand on a SKUL (SKU-Location) basis.    

    Encourage your manufacturers to consider cutting production batch sizes dramatically wherever additional setups will not add actual costs to production. [Note: Additional set-ups in work centers that are not capacity-constrained in meeting actual demand generally add no actual cost because no additional labor is added to the workforce to accomplish them. At least this is true up until the additional set-ups begin to make the resource or work center capacity-constrained when measured against actual demand.]    

  4. Encourage manufacturing and assembly operations in your supply chain to adopt Theory of Constraints (ToC) solutions. ToC methods and POOGI (process of on-going improvement) will help the manufacturing operations in your supply chain balance flow with demand while making them also more stable through improved profits. And, the good news is that the manufacturers’ improved profits will come from internal improvements, not higher prices in the products you buy from them. In fact, your cost of goods from these manufacturers may actually fall as they uncover and leverage excess capacities in their operations.

These combined options—or almost any combination of them—effectively implemented should cause PLTs to begin dropping significantly in a relatively short period of time. This should lead to an improving balance in the flow within your supply chain and your supply chain troubles begin to diminish.



In our next article on supply chain troubles and what you can do about them, we will discuss simple, yet effective, ways to determine just how much stock you should keep at each SKUL (SKU-location).




In the meantime, we would like to hear about your progress in improving your supply chain and the methods you are using to achieve your improvement. Please leave your comments here, of feel free to contact us directly, if you would prefer.


We have been talking about reducing the “ToC Replenishment Time” as a key factor in fixing a many troubles that afflict supply chains.


ToC ReplenishmentDays.jpg


Remember, the ToC Replenishment Time or Theory of Constraints Replenishment Time is the sum of the following factors:

  1. Order Lead Time (OLT)
  2. Transportation (or Shipping) Lead Time (TLT)
  3. Production Lead Time (PLT)


See the previous articles for more details.


How to Reduce Production Lead Time (PLT)


Many supply chain managers and executives who only buy from assemblers or manufacturers feel that nothing they can do will affect what their manufacturing trading partners do with regard to production lead times.


What these managers and executives forget is, it is quite possible that some things they are doing today are, in fact, contributing to longer production lead times.


Permit me to offer a few examples:


  1. Longer Order Lead Times (OLTs) lead to longer Production Lead Times (PLTs) – Perhaps it is by mutual agreement between you and your trading partner that your OLT is longer. It may take you six weeks, for example, to accumulate an order large enough to qualify for a “quantity price break” that gets you the margins you think you need on the products you buy from a given manufacturer.    
    However, transfer batches and pricing batches need not be the same size. Supply chain collaboration means thinking beyond old methods and concepts.    
    What is to keep you from negotiating a deal with your manufacturing trading partner where pricing is based on the total quantities purchased over the course of six months or even a year. Then, disconnected from pricing, replenishment orders can be of any size.    
    Furthermore, if you take the next step of providing visibility to actual demand on a weekly (or, better yet, daily) basis to the manufacturer, the manufacturer can pace is manufacturing to actual demand and not wait to get that huge order before deciding on what products to commit to manufacturing.    
    In fact, it is probably advisable to place your replenishment orders on a weekly or daily basis (separated from pricing agreements). That way, not only does the manufacturer have visibility into actual demand, he can rely on firm orders (not forecasts or guesses) when committing his manufacturing resources to production of the products you need.    
    That means fewer stock-outs and short lead times between the manufacturer’s receipt of your replenishment order and the shipment of replenishment stock.    

  2. Reduce or eliminate policy-induced demand variability – We all know what demand variability does to production. Since demand varies and production resources are limited, supply chain and inventory folks are constantly gazing into crystal balls trying to figure out how best to apportion their limited resources toward the production of goods.    
    The more variability there is in the system, the more difficult it is to make good guesses.    
    As a result, resources frequently end up being committed to the production of the WRONG products (products NOT in demand at the moment) while the RIGHT products (those with immediate actual demand) wait in the queue to be produced. As a result, the manufacturer ends up being overstocked on things you do not need while the order you (and your customers) really want in-hand ends up being delayed.    
    Supply chain managers and executives are constantly trying to shake variability out of the system while, in a great many of the cases, other parts of their organization—typically finance, sales and marketing—are busy creating policies and programs that add more and variability in demand. The policies and programs introduced by finance, sales and marketing add variability in demand that is entirely avoidable (or at least almost so).    
    Every time sales management or finance introduce sales quotas or incentives with an fixed date attached, it is likely that they are introducing variability into the supply chain.    
    Let us say, for example, that salespeople will receive an extra 1.5 percent bonus on all sales in excess of $1 million they close in each quarter.    
    What happens?    
    Sales in the early part of the quarter may languish or even stumble. But as the quarter-end date draws nearer, you can depend upon the fact that sales will spike. Somehow those salespeople who found it so difficult to close a deal in week one of the quarter will suddenly find a way to close three or, even, five deals in the last week of the quarter in order to get their bonuses.    
    All of the demand variability introduced by such ill-advised policies and procedures can easily be avoided by simply constructing sales incentives and marketing programs that provide a constant incentive to buy (or, from the salesperson’s point of view, to sell)—not one predicated upon whether it is the first week of the quarter or the last week of the quarter.    
    Reducing demand variability will allow manufacturers in your supply chain to better allocate their resources and, thus, reduce their PLTs on all products.



We will pick up where we left off with some additional ideas for reducing PLTs in our next article. In the meantime, we would like to have you leave your comments here, or feel free to contact us directly, if you wish.


In previous articles we have pointed out that reducing the total replenishment lead time is a key factor in fixing a many troubles that afflict supply chains.


ToC ReplenishmentDays.jpg


By “total replenishment lead time” we mean what is sometimes referred to as the ToC Replenishment Time or Theory of Constraints Replenishment Time. It is the sum of the following factors:

  1. Order Lead Time (OLT) – the time that elapses between the first consumption of a unit from a SKUL (SKU-Location) and when the order for replenishment of that unit of consumption occurs
  2. Transportation (or Shipping) Lead Time (TLT) – the time spent in movement of an item during replenishment
  3. Production Lead Time (PLT) – the time between the release of an order for replenishment and the release of the shipment of replenishment goods

Dealing with Transportation Lead Times


Typically, reducing transportation lead times means an increase in the cost of transportation. In a firm where cost-world thinking abounds (read: the vast majority of companies in existence today), anything that “increases costs” is nearly always rejected off-hand.


One of the reasons this is so is that costs are so easily measured and easy to see. Costs are, in short, very tangible.


However, as W. Edwards Deming pointed out with such keen insight, all of the truly important numbers for managing a company for success are unknown and can never be known with absolute accuracy. It is, for example, to know how many “potential customers” a company might have. Similarly, it is impossible to know what “market demand” is for a new product working its way through R&D.


Well, for supply chain managers and executives, another important number that can never be known with great accuracy is “the volume of sales lost due to out-of-stocks.”


This problem is exacerbated by the fact that “out-of-stocks” (OOS) virtually always affect sales on the most popular items, makes, models and colors. It’s never the “dogs” that you run out of—it’s the “hot sellers.”


So, when considering spending more money in order to make your supply chain more agile through reductions in TLTs, it is worth knowing your Throughput to Transport Cost Ratio. This single value (for each SKUL) tells you how many units you can ship at the higher cost for shipping before consuming the entire Throughput for a unit sold.


ToC Replen Cost v Frequency_pct.JPG


In the table above, consider a given SKUL we will call ‘Item A.’ In order to increase Throughput from this item, the supply chain managers have determined that greater agility is a must. They have also determined that shipment by air instead of sea freight will double the shipping cost per unit—from five percent to ten percent.


However, the change in Throughput after moving to air freight for this SKUL is only a negative five percent, while Throughput remains at 75 percent.


That means, the supply chain managers and executives conclude, that for every additional sale (every sale not lost to out-of-stocks) covers the additional freight costs for 15 units (75% divided by 5%).


This is the kind of reasoning and innovation that helps take companies from being competitors to being leaders in their region or even their industry.



In our next article, we will talk about actions you can take toward reducing PLT (Production Lead Time).


In the meantime, we would like to hear what you have to say and about the challenges you face with your supply chain—big or small. Please feel free to post your comment here, or contact us directly, if you wish.


In the preceding two parts in this series, we have covered only the preliminaries (for the most part). We have covered the symptoms (Part 1) and, in the remainder of Part 1, along with Part 2, we have discussed the underlying data gathering that will help you expose the depth and breadth of your supply chain troubles. At least, the metrics we have described up to this point will help you quantify the measure of your troubles from what can be known inside the four walls of your organization.


ToC ReplenishmentDays.jpg


Now, in this and subsequent articles, we will start attacking the Undesirable Effects (UDEs) you are experiencing with your inventory and supply chain.


Near the end of Part 2 of this series, we discussed the three components of what we called the ToC (Theory of Constraints) Replenishment Time. Those components were:

  1. Order Lead Time
  2. Production Lead Time
  3. Transportation Lead Time


Many, many companies have already proven the dramatic profit-increasing effect businesses experience when the commit time, energy and money to reducing their ToC Replenishment Time (TRT).


Taking steps to reduce Order Lead Time (OLT)


To reiterate from Part 2, OLT is the time that elapses between the consumption of a unit of any SKUL (SKU-Location) and the placement of the replenishment order for that unit of consumption. This time period is introduced by a combination of business policies, trade terms, business practices and other more or less compelling factors.


What keeps your company from placing orders every day for the SKULs consumed the preceding day?


Usually several factors are involved, such as:

  1. The desire to accumulate sufficiently sized orders to get better pricing from the vendors involved
  2. The desire to accumulate sufficiently sized orders with the goal of reducing transportation costs on the items ordered
  3. The desire to reduce the amount of time, energy and money spent in the reordering process
  4. Minimum order quantities introduced by policies promulgated by either the vendors or by the buyers responsible for replenishment of inventories
  5. Minimum and maximum stock policies, or policies governing reorder points, in the firm’s inventory management efforts


These are all well-intentioned efforts. Most of them are focused on “efficiencies”—efficient use of production resources, transportation resources, or even purchasing personnel. However, none of these policies are aimed at increasing Throughput—the one area in which firms have an open-ended opportunity for ongoing improvement. (For the definition of Throughput, see Part 1 of this series.)


Furthermore, it is my experience that, in a great many companies, while a significant amount of time, money and no small amount of consternation, is leveled at enforcing policies regarding “minimum order quantities,” min-max stock quantities and reorder points, not nearly the same amount of effort was spent in determining why those policies should exist or what quantities should be used for min or max values, or reorder points. Too frequently these values were selected for “convenience” or picked out of the proverbial hat, with little or (usually) no thought being directed toward increasing Throughput.


While we recognize the production quantities and transfer quantities are frequently driven by legitimate exigencies in their respective operations, sometimes the numbers are—like the min/max quantities discussed in the preceding paragraph—are “picked out of hat.”


Too often the story goes something like this: Someone decided that 2,500 units in a production run for item X1244 was a good number to use—and that someone chose that number a decade ago. No one has changed it since. Never mind that the resources used in the production of X1244 are not capacity-constrained and six—yes, six!—additional setups could be performed on that line every day without adding one dollar to operating expenses.


Here are my recommendations for ACTIONS to help move toward reductions in Order Lead Times:

  • Stop placing orders based on forecasts – Except for new items, with no sales history, forecasts should not be used for execution. Forecasts are helpful for planning, but lousy for execution—because they are always wrong. When a forecast is too low, quantities supplied will be insufficient and Throughput will be lost due to out-of-stock conditions. When a forecast is too high, precious production and transportation resources will be tied up producing and transporting the wrong stuff, while the right stuff is delayed. As a result, sales of what customers actually wanted will be lost (along with some customers and follow-on sales of other goods). More sales will be lost when overstocks of potentially ‘stale’ products are liquidated and the sales of the ‘old’ product cannibalize the sales of newly released makes and models.

  • Stop accumulating orders – Supply chains function much better when end-user consumption is visible across the entire supply chain. Consider how much better a manufacturer—weeks removed from point of consumption—could make use of its resources if it knew that point-of-sale consumption just leapt by 36 percent on Item ‘A’ (in fashionable green), while point-of-sale consumption of Item ‘Y’ (in black) just dropped off by 22 percent. The manufacturer can begin managing its production quantities based on near real-time data rather than waiting from a huge order from the distribution center that shows up on the fax 30 days later and ends up not being what the manufacturer had planned for at all in terms of product mix.    

    Even if your agreements with the vendors only make sense when deliveries are taken at larger intervals—monthly or even longer, having your vendors aware of actual demand in near real-time will improve supply chain performance.    

    Nevertheless, if you want to see larger gains in supply chain effectiveness and a diminishing of the symptoms we are discussing, collaborating with your vendors to shrink transfer batch sizes (the quantities that get moved from point-to-point during production or across the supply chain) generally leads to dramatic gains. These transfer batch sizes may be shrunk independent of the size of “orders” or the size of the purchase agreement over some contractual period. And, while we will not discuss the matter here, generally the gains in Throughput from taking this action far outweigh whatever additional transportation expenses might be involved.    

  • End the practice of “minimum order quantities” – Consistent with the discussion just above, seek collaboration with your trading partners to end “minimum order quantity” requirements. Instead, reach an agreement with your supply chain vendors in which price is based on quantities purchased over some specified period of time (e.g., a quarter, six months, a year), but place replenishment orders based on “pull”—the actual demand in the system—not on some artificially concocted “minimum order quantity.”    

  • Cease use of “min/max” order quantities and “re-order points.” Instead, determine a “buffer size” (the quantity you calculate you need to carry per SKUL) to cover all of your expected variability in both supply and demand. Then, at each replenishment, always replenish the buffer in full (less any open purchase orders, plus any open backorders). This simplifies ordering, even it requires more initial effort in working out supply chain collaboration (as discussed in the points above). (See also our other articles on Dynamic Buffer Management [DBM] for Inventory.)    

  • We understand that making these changes requires a paradigm shift in thinking, and it means spending more time (initially) in working our supply chain collaboration details with your trading partners. However, the rewards for movement in this direction are well-documented and proven in thousands of companies around the world.

Let us know your thoughts and send us your questions. You may leave your comments and questions here, or feel free to contact us directly, if you’d like.


In the previous article, we covered the common symptoms of supply chain troubles. We would encourage you to go back to the article an run through the checklist yourself, if you have not done so already.


We also started talking about gathering the data you will need to assess the size of the undesirable effects (UDEs) you are presently experiencing. First, we encouraged you to take a look at your Throughput. We described the calculation, but here it is again in a visual format:


FIG ToC Throughput Calc for Period.JPG


We ended the previous article in this series with a valuable KPI we designated TDDD (Throughput-Dollar-Days-Delayed). This was a single KPI that included both the Throughput value of delayed shipments (read: cash-flow) and number of days shipments were being delayed.


FIG ToC TDDD Calc Example.JPG


But out-of-stocks and delayed shipments are usually only about half the problem for most participants in supply chains. They are frequently facing equally vexing troubles with too much inventory of the wrong things. We need a metric for that, too. A way to help us rationally look at the size of that problem.


For this, we recommend IDDOH (Inventory-Dollar-Days-On-Hand).




Using calculations shown in the spreadsheet below, supply chain managers and executives have data that is more valuable that just inventory turnover rates, for example.


FIG ToC IDDOH Calc Example.JPG


It is one thing to know that you have more than 300 days inventory on-hand for an item that costs you a fraction of a cent and is purchased 100,000 at a time. It is quite another matter to have more than 300 days inventory on-hand for an item where, perhaps, tens of thousands of dollars of cash are needlessly tied up in aging inventory.


By using a spreadsheet similar to the one shown above, it readily becomes obvious that management priority should be given to those items with the largest values in column ‘F’, Inventory-Dollar-Days.


Calculating Throughput Productivity


Not all products (SKUs) are equal. Sales of some products result in greater Throughput for your business (where we define Throughput as Revenues less Truly Variable Costs [TVCs]). And, since it should be your goal to maximize Throughput while minimizing Operating Expenses, we suggest Throughput Productivity be measured according to the following formula:

Throughput Productivity = Throughput / Operating Expenses


The Throughput Productivity KPI can be based on an operating period. For example, you can compare last year’s Throughput Productivity to this year’s results. Management might also find it valuable to compare last year’s average Throughput Productivity to last month’s Throughput Productivity ratio in order to measure ongoing improvement. Monthly Throughput Productivity might be graphed to show gains made over time, as well.


Calculating the Throughput Turnover Ratio


Again, since Throughput is not equal for all SKUs, and since another goal should be to maximize Throughput while minimizing your firm’s investment in inventory, we find the Throughput Turnover Ratio to be a valuable KPI. The Throughput Turnover Ratio is calculated as:

Throughput Turnover = Throughput / Average Inventory


By the way, a simple way to get to “average inventory” for a period is to take the beginning inventory value, add the ending inventory value, and divide the total by two.


Tracking your firm’s month-to-month Throughput Turnover Ratio is another great way to chart your firm’s progress in supply chain management improvement over time.


Looking at your lead times


The total replenishment lead-time for any given SKU consists of three components:


  1. Order Lead Time (OLT) – The time it takes for your operations to accumulate an order for replenishment. This may vary by product line and with other factors, such as “target order size.”

  2. Production Lead Time (PLT) – This is the amount of time it takes the supplying facility to produce (if necessary) and fulfill the order quantity for shipping.

  3. Transportation Lead Time (TLT) – Here we include the time it takes for the SKU to be transported and put physically back into its proper location in your warehouse.


We call the sum of these three component lead time the ToC Replenishment Time (TRT), where ‘ToC’ stands for ‘Theory of Constraints.’


Our recommendation is that you calculate or, at the very least, come up with good estimates of these three lead times for your SKUs. In many cases, these can be grouped by purchase product line to get to pretty good numbers.


Summarize the data


Now is a good time to gather everything that you and your management team have calculated into one place and take a good long look at it before we move on with next steps. Here is what you should have at your fingertips now:


    1. Revenues (for specified period)
    2. Truly Variable Costs (TVCs) (for specified period)
    3. Throughput (for specified period)
    4. Throughput-Dollar-Days-Delayed (TDDD as of a given date)
    5. Inventory-Dollar-Days-On-Hand (IDDOH as of a given date)
    6. Operating Expenses (for specified period)
    7. Throughput Productivity Ratio (for specified period)
    8. Throughput Inventory Turns Ratio (for specified period)
    9. Order Lead Times by SKU-Location*
    10. Production Lead Times by SKU-Location*
    11. Transportation Lead Times by SKU-Location*


* Note: We use SKU-Locations, or SKULs, here because different locations (e.g., warehouses or stores) may be replenished from different sources and have differing average daily demand and ordering policies. As a result, any or all of these parameters may be different by location.


In our next article, we will talk about taking action based on what you have learned from these data-gathering and calculation exercises.



In the meantime, we would like to hear from you. Please feel free to leave your comments here, or feel free to contact us directly, if you wish.


Many small-to-midsized business enterprises struggle with various symptoms—the undesirable effects (UDEs) of supply chain troubles. Too frequently, however, the executives and managers do not have a clear picture of the cause-and-effect in their own business or the industry in which they participate. As a result, they find it difficult to know which levers to “push” and which levers to “pull” in order to get what they are really after: increased profits.




Print out this checklist and check off the appropriate columns as an exercise in honesty with yourself and the condition of your enterprise:













Not Applicable



We experience frequent out-of-stocks, particularly on fast-moving items


We have considerable overstocks, especially on slow-moving items


We have too much inventory almost everywhere


Too frequently, customers are dissatisfied with product availability


We spend too much time, energy and money on expediting, excess freight costs and “emergency” orders


We too often find ourselves scrambling in cross-docking operations instead of in an orderly shipping and receiving mode


Items arrive from our vendors later than expected many times


Our supply lead-times are, in general, too long


We know that we lose sales and sales opportunities due to our inability to supply products at the time they are wanted or needed by our customers


Our warehouses and display spaces are packed and we are running out of room


It can be a real burden on our systems to increase product variety or even take on new products


We end up discounting or liquidating too much stock (or holding on to what we know is pretty much worthless inventory because we “can’t afford” to write the values off our balance sheet)


Expiring product or products becoming obsolete while sitting in our inventory reduces our profitability


Discounted sales of old products just before the release of new products cannibalizes sales of new product releases, so we never make the profits on new releases that we really should


We have way too much cash tied up in inventories and it is hurting our cash-flows that could otherwise be used to build our business in more profitable ways


If you answered honestly and the great majority of your columns are marked “No,” then you and your firm are in pretty good shape. Congratulations!


If your honest answers led to a lot of “Sometimes” checkmarks and that “Sometimes” really means “We don’t know for sure,” then you have a checklist for discovery. Get to it! Find out what’s really going on in your business and industry.


If you checked a majority of boxes in the “Not applicable” column—and it’s true—then you can stop reading this article right now and go on to something more important to your business success.


The the majority of your honest assessments ended up as checkmarks in the “Yes” or “Sometimes” columns (and “sometimes” really means “sometimes”—not “we don’t know”), then there is considerable room for improvement in your supply chain and there steps you can take to start changing things now.


The first thing


First of all, you and your management team are likely going to have to gather some data. In particular, you need to begin to understand three key metrics:


  1. Throughput, which we define as REVENUE less TRULY VARIABLE COSTS (TVCs). TVCs are limited, as the name implies, to only those costs that are truly variable based on the incremental change in revenue. This eliminates all allocations of labor and overhead done based on complex formulas. Included in TVCs are typically costs like raw materials, unit-based duties or taxes, subcontract or outsourcing costs paid for on a per-unit basis, and most sales commissions. Be careful what you include here. Wrong decisions in this category can lead to wrong choices being made in management of your supply chain.    

  2. Inventory (Investment), which we define as all the money your system—read: your business—has tied up in assets of any kind in support of turning inventory into Throughput.    

  3. Operating Expenses are pretty easy to define once you understand TVCs. They are all the monies your company pays out month after month in support of the activities undertaken in turning inventory into Throughput. Simply stated: look at your profit-and-loss statement and then subtract out all of the TVCs. What you have left is Operating Expenses.

Next steps


  1. Calculate your Throughput for a given period (e.g., last year, last quarter, last month, year-to-date).  

  2. Calculate the average value of your inventory on-hand over the period selected in step 1 above.    

  3. Calculate your Operating Expenses for the same period    

  4. Calculate the size of the problem you face today in real terms. We will call the metric Throughput-Dollar-Days-Delayed (TDDD) and we calculate it as the Throughput value of delayed shipments times the number of days the shipment has been delayed. This gives us a single figure—one metric—that tells us the size of the problem both in terms of profit (Throughput) and the days that profit has been delayed from being turned into actual revenue. Use a table like the one below to get you started.  















Order No.




Delayed Qty


Delayed T-value


Days Delayed

D * E = TDDD
Total TDDD >>


Now you are getting somewhere. In step 4 you have a single metric by which to measure improvement profitability, due-date performance, customer service levels and cash flow. This should be helpful beginning today.


We will go forward with more steps in our next article.



In the meantime, we would be delighted to hear from you. Please feel free to leave your comments here or contact us directly.


Filter Blog