Calculating the cost of lead time
with National Vehicle Distribution (NVD)
NVD is an Irish owned company – with facilities in Baldonnel (Dublin), Rosslare (Wexford) and Ringaskiddy (Cork) – offering a range of services to vehicle importers and dealers, i.e., vehicle transport, storage, conversion and repair. With 75 hectares of storage space and a fleet of over 100 vehicle transporters, NVD is Ireland’s leader in vehicle management and is responsible for over 125,000 vehicle movements per year (in Ireland, UK and mainland Europe).
New vehicles arrive into Ireland (via Dublin, Rosslare and Ringaskiddy) and, due to standard contract obligations, must be delivered by NVD to customers (car dealerships) within a three-day window which we refer to as the "lead time”. This lead time has a major influence on cost for NVD. It influences delivery performance, drop size per load, additional unloading time, as well as total loaded distance travelled (fully/part-loaded and empty transporters). It is worth noting that lead time also plays a role in other NVD activities such as workshop services (e.g., five days to complete a vehicle conversion).
Increasing lead time in transport creates more efficient loads (shorter distance and fewer drop points per load) as NVD load planners may wait for multiple deliveries to dealerships in similar locations (or even the same location). NVD’s current approach to quantifying the effect of lead time is to execute a planning simulation study where hypothetical orders are planned for one month under the different lead time conditions. However, this is all done manually (i.e., it is not an automated process), takes several days, and only provides the effect of lead time in the context of the hypothetical loads inspected.
On the other hand, reduction in lead time creates a queue of work due to the variability in daily demand being spread over a shorter timeframe. If allowing the work to queue will put NVD in breach of contract to our customers (i.e., failing to deliver vehicles within the reduced time window), additional resources are required to avoid this. It follows that the shorter the lead time, the more resources are required to do the same amount of work, i.e., shorter lead time increases operating costs.
The above points illustrate how lead time and cost are related. A solution to calculate the general cost of increasing and decreasing lead time is required.