Turnaround time versus on-time delivery rates

July 24, 2012
By: Tim Heston

For years economic growth has been stuck in neutral. Economists are lowering their already low GDP growth projections for 2012. Regarding this, Julia Coronado, chief economist at BNP Paribas, gave Bloomberg an intriguing insight. “Things are so lean and mean, there aren’t a lot of excesses that need to be reduced.” Although such efficiency hasn’t been able to pull the economy into high gear, it also has insulated the economy from a dramatic downturn.

That’s good news--sort of. Neutral is better than reverse, I suppose. But it does mean that the economy probably won’t be pleasant for companies that aren’t lean and mean. The good news: Plenty of fabricators I’ve seen are lean.

Many survivors of the recession don’t have much fat to cut. One expensive fat, though, is inventory, including raw, work-in-process, and finished goods. I’ve visited more shops that have “WIPed” (bad pun intended) their inventory into shape, most notably by shortening turnaround time.

Last week I visited CR Metal Products, a St. Louis fabricator that has implemented an improvement methodology called quick response manufacturing. We’ll be covering the shop in an upcoming issue, but one insight sources offered has stuck in my mind: Turnaround time is more important than on-time delivery rates.

A low on-time delivery rate means a fabricator doesn’t stick by its promises, so on-time delivery certainly is an important metric for customers searching for reliable suppliers. But the rate itself can be misleading. Say a shop has an on-time delivery rate of 80 percent, but what if that shop promises a two-day turnaround, but delivers in three? Meanwhile a shop with 99 percent on-time delivery may pad the schedule. A fabricator with such stellar on-time delivery may not be doing too well financially if it has a long turnaround time. Such lengthy turnarounds may be a sign that a serious amount of cash is tied up in piles of WIP.

Short-turnaround times, on the other hand, can mean that jobs move from one operation to the next quickly, with little to no queuing time. This means more jobs ship out the door in less time, freeing up cash previously tied up in inventory, and a shop increases its capacity using the same resources. That’s surely a sign of financial health.

Turnaround is job-dependent and so difficult to measure, especially if a shop continually lands new work requiring different manufacturing processes. For repeat jobs, lead-time reduction perhaps can be measured over certain time periods.

Still, so many repeat-order customers need shops to keep some finished-goods inventory on-hand. The customer pulls the parts, which triggers the shop to replenish. But when will the next order come? I’ve seen more arrangements like this since the recession. Sure, it increases a fabricator’s risk, because there’s a slight chance the finished goods will become obsolete. But outweighing the risk is the reward of continual business from a large customer.

While job-specific lead-times may be hard to measure, annual inventory turns may give a better, though highly generalized, view of how quickly jobs move. Inventory turns depend on the order mix and the type of work on the floor. But an average over a year can be telling. In the 2011 Financial Ratios & Operational Benchmarking Survey from the Fabricators & Manufacturers Association, 40 percent of respondents reported between 6 and 9 turns a year; 24 percent reported between 10 and 14 turns; while 14 percent said they had 15 turns or more.

The 2012 survey, to be released soon, gives many telling insights, one of which is that inventory turnover. Although results aren’t finalized yet, preliminary reports suggest that more shops are increasing their inventory turns. The change isn’t dramatic, but it’s there.

This suggests more shops are focusing on reducing inventory in the areas they can control--and this mainly involves WIP. They’ve reduced manufacturing time by quickly moving jobs between operations.

To me, quick turnaround is really what being lean and mean is all about. That, I feel, is the true manufacturing renaissance. It’s not the renaissance politicians want, with massive plants hiring thousands of people (voters). It may not even prevent a recession, considering the unemployment rate and the uncertainty in world markets. But judging by Coronado’s comments, it may at least be able to protect us against those disruptive and dramatic bubbles and busts.

FMA Communications Inc.

Tim Heston

Senior Editor
FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-381-1314