Management Insights

The prevailing wisdom in supply chain management says that all else remaining equal, managers should seek to make their supply chains more responsive. In other words, manufacturers should seek to reduce the leadtime to respond to orders from their retailers because this would allow them to reduce stockouts in the supply chain and, hence, would result in higher sales. However, under some circumstances, the opposite is possible. That is, increasing supply chain responsiveness (or reducing leadtimes) can lead to lower sales for the manufacturer. Two effects drive sales to be lower with shorter leadtimes: a ‘‘safety stock ‘‘effect (which comes from the idea that, if lead times are long, retailers must ‘‘protect’’ their service levels by keeping a large inventory, while short lead times decrease the need for such protection), and an ‘‘effort effect’’ (which is driven by the efforts that retailers exert to sell more products). As it turns out, these two effects interact in non intuitive ways, and must be considered before a decision to reduce lead times is implemented.