Delivering goods on time and producing goods with shorter lead times than the market dictates are important competitive tools. On-time delivery of goods is related to a firm's ability to forecast the time required to produce and deliver goods. if a firm has higher inventories than its competitors, then the firm's production lead time is higher than the industry's forecast horizon. High inventories may obscure the actual time required to produce and fill an order. Lower inventories allow actual lead times to be more carefully observed, and more accurate delivery dates can be provided. Shortening lead times is also crucial; doing so is equivalent to lowering work-in-process inventories. A company carrying 10 days of work-in-process inventories has an average production lead time of 10 days. If the company can reduce lead time from 10 to five days; then the company should now be carrying only five days of work-in-process inventories.
As lead times are reduced, it is also possible to reduce finished goods inventories. For example, if the lead time for a product is 10 days and the market requires delivery on demand, then firms must carry,on average, 10 days of finished goods inventory (plus some safety stock to cover demand uncertainty). Suppose that the firm is able to reduce lead time to five days, In this case, finished goods inventory should also be reduced to five days. Thus, the level of inventories signals the organization's ability to respond. High levels relative to those of competitors translate into a competitive disadvantage. In other words, TOC emphasizes reduction of inventories by reducing lead times.