Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

1.1.6 The Customer Tolerance Time (or Demand Lead Time), and the Role of Inventories

Intended learning outcomes: Describe supply, demand, lead time, and customer tolerance time. Explain the problem of temporal synchronization between supply and demand as well as the role of various kinds of inventories in solving this problem.

A fundamental problem in logistics management is temporal synchroni­zation between supply and demand. Here are some basic definitions, according to [APIC16].

Supply is the quantity of goods available for use. 
Demand is the need for a particular product or component. The demand could come from any number of sources, e.g., customer order or forecast, an interplant requirement, or a request from a branch warehouse for a spare part, or for manufacturing another product. 
Actual demand is composed of customer orders, and often allocations of components to production or distribution. 

Demand forecasting is an estimation of future demand. Demand prognosis is used here synonymously.
Lead time is a span of time required to perform a process (or a series of operations). In a logistics context, it is the time between the recognition of the need for an order and the receipt of goods. 
Customer tolerance time, or demand lead time, is the time span the customer will (or can) tolerate from order release to the delivery of the product or the fulfillment of the service. 
Delivery lead time is the total time required to receive, fill, and deliver an order, from the receipt of a customer order to the delivery of the product or the fulfillment of the service. Delivery cycle, delivery time, or time to delivery are used synonymously.
The delivery policy is the company’s objective for the time to deliver the product after the receipt of a customer’s order.

In a market-oriented economy, the consumer expresses a need as demand for a product. A manufacturer then attempts to fulfill the demand. In principle, design and manufacturing are thus controlled by demand: They should begin only when the need has been validly formulated. In the world of practice, this ideal orientation of the producer toward the consumer is often not possible. On the one hand the delivery lead time may be longer than the customer tolerance time. Obvious examples are medications, groceries, or tools. On the other hand, in nature, many basic materials are ready at a point in time that does not coincide with the timing of the consumer’s need. Obvious examples are foodstuffs and energy. In many cases, however, the relationship between supply and de­mand determines whether customers can enforce their required delivery lead times.

Storage of goods over time plays an important role in solving this problem, allowing temporal synchronization between supply and demand.

Storage is the retention of goods (i.e., parts or products) for future use or shipment (cof. [APIC16]). 
Warehouse, store, or, more precisely, goods store are possible terms for the infrastructure for the storage of goods. 

Inventory includes all physical items in any form that can be found in the company. Inventory appears as:
- On-hand balance, which is the inventory of stored items, for examp­le, items used to support production (raw materials), customer service (end products or spare parts), and supporting activities (MRO items).   
- In-process inventory, or work-in-process (WIP), meaning goods in various stages of completion throughout the plant.   
- In-transit inventory, or transportation inventory, meaning goods moving between two locations and owned by the company in accordance with the agreed-upon inco­terms, which are terms used in international commercial transactions. 

Inventory at sufficiently high levels in the value-adding process may allow the company to meet the customer tolerance time. But there are also dis­advantages. Inventory ties up capital and requires space. Because of limited shelf life (that is, the length of time an item may be held in inventory before it becomes unusable), goods may perish, become obsolete, dama­ged, or destroyed. Keeping an inventory only makes sense where stored goods will be turned over rapidly enough. In order to minimize these disadvantages, inventory must therefore be positioned at the right levels during design and manufacturing (and, analogous­ly, disposal). This means that goods to be stored should ideally involve none of the disadvantages mentioned above. In Figure, there are two stores within design and manufacturing.

Fig.        Storage of goods within logistics.

A goods store decouples the processes upstream and downstream from this point, and therefore demand from supply. The following definitions reflect this point of view:

Decoupling is the process of creating independence between use and supply of material. Decoupling inventory is the amount of inventory kept at a decoupling point ([APIC16]). 

Decoupling points are the locations along the value-added process where inventory is placed to create independence between processes or entities ([APIC16]).

Decoupling points constitute a degree of freedom in logistics and operations management. Their selection is a strategic decision that determines delivery lead times and the inventory investment — that is, the dollars that are in all levels of inventory [APIC16].

Course section 1.1: Subsections and their intended learning outcomes