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A Guide To Lead Time: How It Works and How Do You Calculate It

Learn about what lead time is, how it works, and what it means for inventory management, production, and manufacturing.

The supply chain world is more competitive than ever. Today, businesses are searching for tools and solutions to help them get an edge over others through their supply chains. In this world, lead time has emerged as a critical tool for supply chains to ensure success.

What is lead time?

Lead time is the period between the initiation and completion of any process. Typically, the shorter the lead time, the better the business performs. However, across various industries, the lead time definition may differ. A fast food’s lead time might be one hour, but a fashion e-commerce platform could take a day or two. The industry, innovation, and customers determine the lead time at every point. Getting your lead time right for your business will significantly impact its success.

Understanding lead times

Lead times are essential in achieving optimal results from your business operations. But what are the lead time factors?

  • Manufacturing process: A manufacturing process filled with too many inefficiencies, errors, or decision-making that takes too long will impact the overall lead time of the supply chain.
  • Transportation: Although this is straightforward, unexpected challenges will often impact lead times. It could be traffic congestion, vehicle breakdown, or sometimes accidents.
  • Supplier reliability: Suppliers are critical components of modern supply chain operations. Because of this, their performance (good or bad) impacts the lead time.
  • Customer demands: Customer demand has a significant influence on lead time. To a great extent, what customers want determines the business’s output.

Why is understanding lead time important?

It’s important to understand lead time to implement it in your business successfully. With a thorough understanding of lead times, you can achieve the following:

  • Effective planning: When you understand the lead time concept, you can plan your supply chain and leverage relationships, processes, and expertise more effectively.
  • Better decision-making: It empowers you to make better decisions geared towards maximizing the productivity and output of your supply chain.
  • Customer satisfaction: In a world where customers want faster and more accurate orders, it will help you serve them better and meet their demands. This inevitably increases customer satisfaction.
  • Supply Chain Collaboration: It enhances your collaboration with other parties (external and internal) across the supply chain operation, primarily because goals are set and readily communicated promptly.

The 8 components of lead time

You can’t understand lead time without having a firm grasp on the components that make it up.

Let’s explore eight components of lead time:

  • Processing time: This is the time it takes to completely process an order from the point of initiation.
  • Manufacturing time: The amount of time it takes your business to manufacture a product. This varies widely and depends on the industry.
  • Procurement time: This is the time it takes for your business or supply chain operation to source or acquire the necessary raw materials it needs.
  • Transportation time: Is the time it takes for the goods to be distributed completely. It also considers the time it takes to transport a product from source to destination.
  • Waiting time: This is also known as idle time. It’s how long a product or material takes to sit between processes across the supply chain. Waiting time can be due to delays or disruptions in the supply chain process.
  • Queue time: The time spent waiting in lines or queues after an order has been made. The queue time could be physical or virtual.
  • Inspection time: This considers how long it takes for the inspection process during quality control to be completed. It often depends on external factors.
  • Lead time variability: This considers the degree of variation or unpredictability in lead time. These variations usually result from demand fluctuations, disruptions, and delays in the supply chain process.

Average lead time calculation

Calculating your average lead time is a process that helps you determine the performance of your business in relation to the lead time factor.

So, how do you calculate lead time?

  1. Gather all the necessary data.
  2. Analyze the collected data using tech tools like spreadsheets or ERP solutions. And ensure the accuracy of all collected data.
  3. Calculate individual lead times, using the lead time formula. Do this by subtracting the delivery date or time from the order date and time. The difference is your lead time.
  4. Find the average of all lead times when you are done calculating the individual lead times. Do this by dividing the sum of all individual lead times by the number of entries.

Here’s an example:

Order ID ORDER DATE ORDER DELIVERY DATE LEAD TIME (Days)
A123 Jan 5, 2024 Jan 12, 2024 7
B456 Jan 10, 2024 Jan 19, 2024 9
C789 Jan 15, 2024 Jan 27, 2024 12
D012 Jan 20, 2024 Feb 1, 2024 12
40
The Average Lead Time will be 40 / 4 (because 4 is the number of entries).
This will mean the Average Lead Time = 10 days

Inventory lead time control

To reach an optimal lead time, it’s essential to take note of strategies for managing and controlling it.

Here are a few:

  • Demand forecasting: Knowing and understanding your customers’ demand helps you plan and optimize your supply chain processes effectively. Your demand forecasting can impact production, inventory management, and the distribution process.
  • Collaboration/strategic partnership: Integrating your suppliers and building a strategic partnership allows both parties to streamline communication and expectations effectively. It’s a useful tool for enhancing productivity, mitigating risks, and promoting innovation in the supply chain.
  • Streamline the supply chain process: Deploy initiatives such as lean operations,
    decentralized decision-making, and continuous improvement to remove bottlenecks across the supply chain. This will help increase productivity and enhance better outcomes in the business operation.
  • Optimize inventory management: Your inventory is a central figure in controlling your lead times. Optimizing it is a no-brainer. To do that effectively, you may leverage inventory control techniques such as ABC Analysis, safety stock, and MOQ.
  • Automation: Automation simplifies any operation. It helps with repetitive tasks and reduces errors across the supply chain. Both of which are essential to improving lead times.

What is product lead time?

Product lead time is the time it takes to produce and deliver a finished product to the customer.

Factors affecting product lead times

When done right, these factors could be the difference between success and failure in optimizing your product lead times.

  • Production process: The complexity and difficulty of the process impact the lead time. A process that is too complicated or complex derails the lead time, while the reverse will improve it.
  • Material availability: Lead time is faster when the necessary raw materials and infrastructure are in place. On the other hand, if any of them are lacking, operations slow down or are delayed, extending lead time.
  • Production capacity: The right infrastructure or capacity will allow you to produce or manufacture more quickly. Poor capacity will have a negative effect.
  • Transportation or distribution process: Transportation is very important because it is the process that takes the product from business to customer. Delays or disruptions in this process will impact lead times. At the same time, seamless transportation will improve lead time.

What is material lead time?

Material lead time is the time required to procure raw materials and components for production.

Methods for reducing material lead times

One can reduce lead time and improve raw material availability by utilizing the following strategies.

  • Supplier collaboration: Effective collaboration means communicating and integrating with suppliers to enhance the material delivery process. This could sometimes mean syncing operational processes.
  • Just-in-Time inventory: An inventory management system delivers the raw materials to the business on time or when needed. However, for it to work, there has to be effective communication and streamlining of both operations.
  • Strategic sourcing: This entails partnering with suppliers for the long term in a manner that benefits both businesses. This sort of agreement puts pressure on the supplier to take your business seriously and make it a priority, which naturally improves the lead time.
  • Dual sourcing: Sometimes, a supplier may do everything right, but external situations beyond their control could derail the entire operation. Examples of these are natural disasters, accidents, or vehicle breakdowns. Backups are necessary to prevent delays or disruptions.

What is production lead time?

Production lead time is the total time required to manufacture a product, including processing, setup, and transit time.

Strategies for optimizing lead time in production

The production process can be strenuous and complicated, leading to longer lead time in the overall operation. The following strategies will help improve it:

  • Lean manufacturing principles: These principles entail value streams, flow, pull, and perfection. Applying them accordingly will help streamline and improve operations or processes.
  • Production process automation: Automating the production process reduces repetitive tasks, errors, and waste. All of these help improve efficiency and lead times in the production process.
  • Workflow efficiency: This is the system that allows the staff and equipment to carry out operations. A great system will enhance overall outputs, including outputs.

What is lead time order processing?

Lead time order processing is the time between when an order is made and the time it takes to process it completely, including the delivery. As we mentioned earlier, supply chains are quite competitive. In fact, competition in the modern economy is less between businesses and more between their supply chains. This is why order processing is very important. Primarily because the market demands shorter lead times. When optimized, the lead time order processing will eliminate mistakes, speed up the process, and ensure every party can carry out their tasks appropriately. In turn, you can expect the lead time to improve, as well as the customers’ satisfaction.

Technology and systems for streamlining order processing

Fortunately, new technologies are in place to help streamline and improve the efficiency of order processing.

  • Centralized Order Management Systems: This system receives, analyzes, and allocates order processing to the respective people, platforms, or departments.
  • Warehouse Management System: This is a great tool or application for organizing, controlling, and tracking the inventory in any supply chain operation.
  • Robotic Process Automation (RPA): Robots are machines that help simplify order processing. They perform repetitive tasks like data entry, invoice generation, and order validation. With RPA, these tasks are done better and faster, and lead time improves.
  • Machine Learning (ML): With machine learning, you have applications designed to accumulate and analyze historical data for insights that could be leveraged for improvements. Using these insights, the machine can predict future demand patterns and optimize inventory levels, leading to faster order fulfillment.

What is a customer lead time?

Customer lead time is the time from order placement to delivery to the customer. Customer lead times are very important because they directly deal with the customer. However, other business operations and lead times will often determine the customer lead time. When done well, the customer lead time will enhance customer satisfaction, retention rates, and competitive advantage. This is because customers want faster and more accurate delivery times. They’d be reluctant to go to other businesses if you can get this right.

Lead time analysis in inventory management

Lead time analysis simply explores the supply chain and identifies areas that need improvement. It helps improve the lead time of the supply chain operation.

In inventory management, lead time analysis is a vital tool for streamlining and optimizing the inventory management process. You can achieve this by improving warehouse layouts to facilitate an easier flow of goods.

With the lead time analysis, you can spot optimal reorder points and safety stock and leverage them to draw up inventory replenishment strategies that ensure stocks do not run out. This benefits the inventory management team because it helps them improve order processing and reduce lead times.

Lead time analysis also allows you to effectively manage inventory stocks, enabling you to deliver to customers on time and in the right quantity or condition.

Lead time is a critical factor in inventory management, especially when dealing with or managing inventory carrying costs.

If you can achieve higher lead times, you can reduce inventory-carrying costs. And enhance inventory turnovers. However, all of these are dependent on the customer’s demand.

Lead time in business operations

The lead times in various supply chain and business operations impact the overall lead time performance of the business.

It is similar to a relay race, where the speed time of each team member has an overall impact on the team’s outcome.

The same applies here. If the lead time in procurement is poor, product planning and distribution will be impacted. Working on the overall lead time average is important, not just one department.

Best practices for integrating lead time considerations into overall business strategies and operations management

Integrating lead time considerations can be challenging. However, the strategies mentioned below will make the process easier.

  • Strategic planning: It begins with planning strategically and considering the nuances and resources impacting your lead time. If done well, your operations can be adjusted to factor in lead time considerations.
  • Transparency and visibility: Enhancing transparency and visibility in your supply chain can help you spot problems that hinder lead times or negatively impact them.
  • Process optimization: This is the improvement of any process. Typically, when you improve a process, it will function better and increase productivity. This will, in turn, help enhance the lead time.
  • Technology adoptions: Adopting tech tools and applications throughout the business and operations improves productivity. You will also enjoy reduced errors, repetitive tasks, and brain drain. Technology is a critical factor in optimizing lead time.

What is lead time in inventory management?

Solving for lead time in your stock management helps optimize the process in several ways.

Here are three ways:

  • Forecasting: It pushes the department or business to enhance forecasting abilities because it will help them stay one step ahead of the customer demands, reducing lead times.
  • Inventory turnover: Faster lead time means more customers, which leads to more inventory turnover. This forces the business to set up its inventory to expedite the flow.
  • Order fulfillment: Improving lead time optimizes the order fulfillment process and increases output. This also means ensuring there is always inventory on the ground.

What is lead time in stock management?

Take, for example, Jason’s furniture.

Jason’s Furniture is a small online furniture retailer specializing in remaking and customizing the classics.

Upon the customer’s request, the business enjoys an average lead time of 26 days for making its furniture. Others may take anywhere from 30-60 days.

The company can do this primarily because it has streamlined its stock management process.

Now, the company enjoys:

  • Faster inventory turnover
  • Lower holding costs
  • Shorter lead times than most of their competitors
  • Better demand forecasting

What is the significance of lead time in business operations

The shorter your lead times are, the better your operation will perform. This shows that orders are managed well and helps your business stay on track to reach its goals.

Here’s what you can expect:

  • Efficient operations: By prioritizing lead times in your business, you can streamline production schedules, minimize delays, and ultimately enhance customer satisfaction.
  • Better customer satisfaction: Customers are happy when the goods ordered arrive faster or on time. This makes them loyal and willing to support your business.
  • Financial performance: Of course, an optimized system means less waste, fewer errors, and fewer expenses. It also means more sales.

Engaging in these activities will assist in improving the financial stability of the business.

What are the challenges of managing lead times effectively?

Businesses can face a few challenges when managing or enhancing their lead times.

Here are a few to consider:

  • Supplier reliability: Businesses can be frustrated when suppliers fail to deliver on their promises. While the supplier may be innocent in some cases, often, the fault lies with them. Dealing with such a supplier can make it challenging to enforce better lead times.
  • Production variability: Disruptions or a breakdown of the production process can impact or affect the lead time of any given product. To avoid this, it is important to invest in predictive maintenance.
  • Demand forecasting uncertainty: Demand forecasting or planning is not always perfect. However, it’s a useful tool that gives you an idea of what customers think. Now, sometimes, especially for seasonal goods, that demand can be uncertain. This uncertainty will impact your ability to plan properly.
  • Lack of adequate infrastructure: Infrastructure is a big part of supply chain management and any decent business operation. The lack of adequate infrastructure can impede the entire operation. For instance, the lack of road-worthy vehicles can and will delay transportation.

How can lead times be optimized for efficiency?

Despite the challenges, there are certain strategies or approaches businesses can take to improve their lead time for best results:

  • Overall process improvement: Increasing the overall process of your business or supply chain operation will inevitably improve your lead times. Even without you trying to do so much about the lead time. This is because better processes lead to faster outputs and deliveries.
  • Strategic partnership/supplier collaboration: Your suppliers are important to your supply chain management. You can’t focus on your supply chain and then forget to improve supplier performance and relationships. Effective collaboration between suppliers and partners can lead to better lead times, as all parties are aware of expectations and work towards a common goal.
  • Technology adoption: Technology has been a useful tool in modern-day supply chain management, and no one expects it to stop anytime soon. With technology in place, you can 10X your supply chain operations with minimal effort. It will also come in handy when trying to improve your lead time.
  • Invest in staff training: Effective staff training equips them with essential skills to significantly influence supply chain planning operations. Continuous training also enhances their skills in utilizing the technology, enabling them to solve problems quickly and improve processes.

What role does technology play in lead time management?

Technology plays an active role in enhancing lead times. Various applications and tools help streamline and optimize operations, which invariably impacts lead time.

Here are a few examples of technology that will enhance lead times:

  • ERP systems: With an ERP, you have visibility of everything from inventory levels to transportation status, all in one place. This level of transparency enhances better planning and real-time adjustments to avoid delays.
  • Inventory management software: This application lets you monitor and measure lead times for various processes or products. It can also identify areas for improvement and suggest optimal stock levels to avoid stock-outs and excess stock.
  • Supply chain analytics: Using analytics in the supply chain operation enables you to predict potential issues or delays, identify their root cause, and develop a workable solution. This can also be applied to lead time, promoting shorter lead times in the system.

Conclusion

Getting your lead time right is fundamental to success in modern supply chain management. Nowadays, customers have high expectations and demand to receive their orders on time. If you can’t deliver promptly, they’ll just switch to another supplier. As competition is constantly striving to optimize their lead times, it’s important for you to do the same.

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