As you search for the meaning of lead time, you’ve probably noticed that the term has various explanations. That’s because it has multiple, industry-specific definitions and applications.
Lead time in supply chain is the period between placing and receiving an order. It includes how long it takes to process an order, create or obtain the ordered materials, and deliver them to the final destination. The shorter the lead time, the more efficient your supply chain operations.
Importance of Lead Time in Supply Chain Management
Understanding your lead times can improve customer satisfaction. Once you know the period between ordering and receiving raw materials from suppliers, you can take steps to shorten the duration. A shorter lead time can speed production in your company, which helps you meet customer expectations for quick order fulfillment.
Besides enhancing customer satisfaction, lead time helps manage supplier relationships. For instance, you can set clear expectations with suppliers regarding acceptable lead time ranges and track their delivery timelines in a particular period. You can then prioritize suppliers who consistently meet expectations and drop those who frequently miss delivery deadlines.
Types of Lead Times
There are five main types of lead times:
- Production Lead Time: The duration between when you start processing raw materials and when you create a finished product. It focuses solely on the manufacturing process, excluding the time it takes to procure raw materials.
- Transportation Lead Time: How long it takes to ship something from the source to the final destination. This includes the time required to transport a product from a supplier, process it through customs, and eventually bring it to your organization.
- Inventory Lead Time: The time between ordering stock, receiving the shipment, and recording it in your organization’s inventory management software.
- Order Processing Lead Time: The period from when someone places an order to when a seller fulfills the order, excluding shipping and delivery time. It includes the time it takes to pick and pack an order and prepare it for shipping.
- Customer Lead Time: The duration between placing and receiving an order, including shipping and delivery time.
Factors Influencing Lead Time
Many things can shorten or lengthen your lead time, but here are the main influencing factors:
Supplier Reliability
Reliable suppliers consistently deliver what you need when you need it without unwanted surprises. They stick to your agreed-upon timelines and are more likely to handle any issues that arise quickly and efficiently.
Material Availability
If your organization depends on raw materials to produce goods or deliver services, readily available materials are vital in keeping your lead time short and predictable.
But what happens if the goods aren’t available when you need them? This delay increases your overall material lead time and, ultimately, lengthens the duration of fulfilling customers’ orders.
Logistics Efficiency
Efficient logistics mean that once orders are ready to go, they are packed and transported to the correct destination with little to no delays. If your transportation processes are inefficient due to warehousing issues or poor routing, your lead time can add up pretty quickly.
Tracking Lead Time
To reduce lead time and make your supply chain more efficient, you need to understand how to measure it.
First, identify the type of supply chain lead time you want to determine. If it’s production lead time, for example, simply add up the time spent on each part of the process. You can calculate the overall lead time by checking when you began and ended production of a particular product.
Other ways to measure and monitor lead time include:
Utilizing Technology
With supply chain visibility solutions like GAINS, you can accurately predict and manage lead times for each supplier. You get real-time insights into your supply chain, from raw material procurement to product delivery.
Implementing Key Performance Indicators (KPIs)
You can use metrics like on-time delivery and order cycle time to measure and track lead time.
On-time delivery measures the number of orders your supplier delivers on time or before the promised delivery date. On the other hand, order cycle time measures how long it takes to process an order, from the moment you place it to when your supplier delivers it to your organization.
Analyzing Data for Continuous Improvement
Analyzing lead time data can help you spot patterns. Are there certain suppliers who consistently have longer lead times? Is a particular stage in your supply chain operations causing delays?
Data-driven insights can show you where things are going wrong and where you can improve your supply chain.
Tips and Strategies for Optimizing Lead Time
Refine Procurement Processes
Check all stages of your supply chain, from when you placed an order to the delivery date. Is the lead time short enough, or is there room for improvement? The goal is to identify delays, determine where they’re happening, and find out why they’re occurring.
Adopt Lean Manufacturing Techniques
Lean manufacturing is a collection of strategic approaches that focus on eliminating unnecessary processes. It emphasizes creating high-quality products and delivering them to customers on time at the least possible cost. Lean techniques like Just-in-Time (JIT) and Total Productive Maintenance (TPM) can reduce manufacturing lead time.
Enhancing Communication With Suppliers
Inform your suppliers about your lead time expectations to ensure you’re both on the same page about delivery timelines. Meanwhile, your suppliers should notify you in advance whenever they anticipate delays. This way, you can prepare early for future disruptions with supply chain scenario planning.
Impact of Lead Time on Inventory Management
Knowing how long it takes to place orders and receive materials from suppliers can help you optimize inventory management. If you predict longer lead times due to potential supply chain disruptions, your organization can hold safety stock — extra inventory for meeting customer demand even if there are delays in the supply chain.
However, if you hold more stock than you currently need, you tie up capital in excess inventory, which can hinder growth in resource-stripped organizations. It can also increase storage costs because you’ll have extra goods in the warehouse. Shortening your lead times as much as possible reduces the need to hold excess inventory.
Ensure Precise Lead Time Predictions With GAINS
Sudden supply chain disruptions and the unpredictability of supplier deliveries have made lead time uncertainty a huge challenge in supply chain management. Plus, solving this problem with traditional tools is almost impossible.
With a robust, modern supply chain solution like GAINS, you use powerful AI algorithms to identify hidden, complex relationships in your lead time data. You can then use the deep insights to accurately forecast how long it will take for suppliers to fulfill your orders. Learn more about GAINS today.