Back to Volume 2 | Summer 2017

Consequence of Lead Time on Capital Project Outcomes

Executive Summary

Many people know of the saying “time is money” but do not always understand why the relationship between time and money exists. From a production perspective, time is money because time impacts control of time to market. Longer time to market often results in loss of revenue. It also increases cost due to unnecessary handling, holding and preservation of inventory not to mention the potential for damage, theft and obsolescence. In the most extreme examples on the most complex projects, stocks explode to the point that construction crews have difficulty knowing what is and is not onsite, leading to multiple orders or double manufacturing. Longer time and its associated costs also increase the need for more cash, resulting in lost opportunity, additional financing cost, etc. Therefore, lead time compression, the associated supply process improvement and better management of existing stocks / WIP are important elements of any supply chain optimization effort as well as supplier development programs for capital projects.

Despite its importance, lead time compression is an often overlooked and significant area of cost reduction. Long lead time creates the need to procure items in advance of when it is optimal to meet demand and associated dates. Owners who are required by lead times to make decisions too early to procure such pieces of materials and equipment may have to make these choices in the presence of considerable uncertainty, with potentially significant value loss. Once these decisions are made, the ability to influence subsequent decisions is drastically reduced, as illustrated in the Figure below, drawn from Gluck & Foster, Harvard Business Review, Sept 1975. One example is having to make choices on the oil and gas handling capacity of equipment, before full knowledge of likely production rates is confirmed. This can result in significant oversizing of equipment and additional unnecessary cost, because the decision timing was dictated by lead times rather than the availability of the necessary information to make an informed decision.

At the most fundamental level is the understanding that three key elements of time exist: lead time, cycle time and (raw) process time. Recognizing the difference between each of these elements of time and their relationship is the first step in learning how to compress lead time (and the associated cost). It is also important to understand how various decisions extend lead time and result in other unintended consequences.

To best understand how the various elements of time are occurring, adoption of the production system perspective is needed. The key idea here is that the focus is on physical transformation activity versus administrative and functional activity. Administrative and functional activity are only considered if they impact the physical transformation activity.

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