E-Sourcing Forum » Lead Time Optimization (LTO)

Lead Time Optimization (LTO)

May 15th, 2006 at 06:22am David Bush - Iasta

Lead Time Optimization (LTO) – the optimized selection and management of inbound supply options with respect to (highly) uncertain demand and long production lead times, is critical to achieving significant supply chain savings in high-turnover fad-based industries such as apparel, textiles, toys, and consumer electronics where (high) markdowns and stockouts are critical to profitability and brand reputation.

Traditional decision optimization models assume that the demand is fixed with limited or no variance and the optimal solutions are often optimal ONLY for a given fixed demand. In some cases, even a minor fluctuation can completely change an optimal allocation with respect to selected suppliers, carriers, and demand allocation. Of course, in reality, once contracts have been inked, drastic changes are not possible and the only room left for optimization is specific quantities on specific dates and choice of carrier.

In verticals where demand is highly uncertain, and many other verticals where demand has a degree of uncertainty, what is truly desired is a solution that is overall-optimal with respect to the likely demand range and near-overall-optimal with respect to the less likely, but possible demand range. In this situation, the best solution is not necessarily the solution that is optimal at any particular demand point, but that is, on average, the most near-optimal solution to all the likely (and possible) demand points.

In an LTO optimization, each supplier is allocated a percentage of the business and a minimum guarantee. Remembering that, in uncertain industries, the best business model is usually one that includes collaborative raw material and capacity plans, dynamic production schedules, and a blend of shipping options, this approach can minimize the loss in terms of penalties if demand is not met while maximizing the availability of suppliers to be able to provide excess capacity if required.

Furthermore, as with any balanced decision optimization, the focus is on more then just lowest cost. Selecting the right suppliers and allowing for flexible demands to maximize returns on each unit sold can also contribute substantially to the bottom line and increase corporate profits big time.

A good white paper is “Lead Time Optimization: The Strategic Link to Earnings”, despite the fact it was sponsored by SupplyChainge with the express intent of promoting their platform.

For more information, see AMR’s recent insider alert.

This is why Iasta is taking the advice of the masters. In the near future, watch for Iasta to follow in the footsteps of market leaders in LTO such as Infosys and SupplyChainge as it starts to incorporate innovative LTO capabilities into future releases of its products.

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Entry Filed under: General, Global Supply Issues/Risk, Optimization, Technology / SaaS

1 Comment Add your own

1. E-Sourcing Forum: the sou&hellip | June 22nd, 2006 at 8:48 am

[...] One of the technologies Zara uses to accomplish this impressive feat, and stay profitable, is Lead-Time Optimization. Lead Time Optimization, succinctly defined as the optimized selection and management of inbound supply chains with respect to (highly) uncertain demand and long production lead times, attempts to optimize product line profits by attacking and minimizing the key drivers that lead to markdowns, stock outs, inventory turns, and reductions in working capital, all of which have a negative impact on profit. Recognizing that the industry is fraught with uncertain fluctuating demands that cannot be predicted with any significant degree of accuracy in advance, the lead time optimization products try to optimize around demand risk that results from the impact of variable demands on production schedules, capacity, shipping, and associated costs by assigning dollar values to risks, speed, and flexibility. [...]

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