Lead times are an important aspect of logistics, yet they are often misunderstood and underestimated. Lead times refer to the amount of time between the start of a supply chain process and the completion of the same process. In supply chain management, lead time exclusively refers to the time it takes for a supplier company to have goods ready for delivery.
This includes the time it takes for raw materials to be ordered and received, the time it takes for the products to be manufactured and shipped, and the time it takes for the products to be delivered to their final destination. Lead times are a crucial factor in the successful completion of any supply chain process, and they can have a major impact on the profitability of a business. Lead time is an essential metric across many industries.
This article will look at the different types of lead times, the factors that influence lead times, and how companies can use lead times to their advantage. We will also explore best practices for managing lead times, such as utilizing automation and optimizing processes. Finally, we will discuss the potential risks associated with lead times, such as delays and customer dissatisfaction, and how to mitigate these risks.
What is Lead Time?
Lead time is the time it takes to fulfill an order from the moment it is confirmed until the order is delivered in full. In the manufacturing industry, companies mostly deal with three types of lead times:
- Material Lead Time is the time it takes for suppliers to deliver ordered goods to the manufacturer.
- Production Lead Time is the time it takes from submitting a manufacturing order up until the finished product is received into stock.
- Customer Lead Time is the time it takes for the company to produce the goods and/or deliver them to their customers, i.e. from order until fulfillment.
Customer lead time is approached differently in make-to-stock (MTS) and make-to-order (MTO) production modes. In MTO, production lead time signifies the expected time frame from customer order through production until delivery. In MTS, however, customer orders are fulfilled from stock, which is then replenished with another manufacturing order. Make-to-Stock lead times are therefore much shorter than those of make-to-order companies.
Another term is cumulative lead time, which is a combination of material lead time, production lead time, and customer lead time. It presumes that no materials are available in stock, i.e. everything needs to be ordered from suppliers. Therefore, it measures the time it takes from confirming a customer order, putting in a purchase order and receiving the materials needed, manufacturing the product, and delivering it to the customer.
There are also a couple of other, related terms to remember:
- Cycle time: the number of days it takes to complete a particular task, or cycle, from start to finish.
- Takt time: the rate at which products need to be completed in order to keep up with customer demand.
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Lead Time Formula
There isn’t one way to calculate lead time, but the most common is to subtract the order request date from the order delivery date.
Lead Time (LT) = Order Delivery Date – Order Request Date
When dealing with inventory management, you’ll include the supply delay and the reordering delay. To calculate lead time in this instance, add the supply delay to the reordering delay.
Lead Time (LT) = Supply Delay (SD) + Reordering Delay (RD)
Types of Lead Time
Aside from the three mentioned above, in general there are five different types of lead times: production, transportation, inventory, order processing, and customer service.
Production Lead Time
The production lead time is the amount of time it takes to produce a product or service. This includes the time it takes to source materials, manufacture, package, and prepare products for shipment. In some cases, production lead times can take weeks or even months to complete, depending on the complexity of the product. This type of lead time is especially important for companies that manufacture their own products, since they have to plan ahead to ensure that the product is ready when needed.
Transportation Lead Time
Transportation lead time is the amount of time it takes for a shipment to move from its point of origin to its destination. This includes the time it takes for the product to be shipped from the manufacturer, go through customs and other regulatory processes, and finally reach its destination. Transportation lead times can vary significantly depending on the mode of transportation used, the distance the shipment has to travel, and other factors.
Inventory Lead Time
Inventory lead time is the amount of time it takes to receive a shipment of inventory. This includes the time it takes to place the order, receive the shipment, and process it into the company’s inventory management system. Inventory lead times can be affected by the availability of the item, the shipping method used, and the processing times at the receiving end.
Order Processing Lead Time
Order processing lead time is the amount of time it takes to process and fill an order. This includes the time it takes to pick and pack the items, prepare the shipment, and arrange for its delivery. This type of lead time is especially important for businesses that rely on orders from customers, as it affects their ability to fulfill orders in a timely manner.
Customer Service Lead Time
Customer service lead time is the amount of time it takes for a customer service representative to respond to an inquiry or address a customer’s issue. This includes the time it takes for a representative to answer the phone, assess the issue, and provide a resolution. Customer service lead times are important for companies that rely on customer service as a key part of their business, as they need to ensure that customers receive prompt and helpful responses.
Lead Time Factors
The factors that influence lead times can be divided into two categories: internal and external. Internal factors include the processes and procedures within a company, such as the time it takes to complete an order, the time it takes to manufacture the products or components, and the time it takes to ship the products or components. External factors include the availability of raw materials, the availability of transportation, and the availability of labor. Companies should consider all of these factors when determining lead times.
Automation and Lead Times
Companies can use lead times to their advantage by utilizing automation and optimizing processes. Automation can help to reduce lead times by streamlining the ordering, manufacturing, shipping, and delivery processes. Automation can also help to reduce errors and increase the accuracy of lead times. In addition, companies should optimize their processes by identifying and eliminating supply chain bottlenecks and by streamlining their operations. This can help to reduce lead times and ensure timely deliveries.
Problems with Lead Times
Lead times can also present risks to a company, such as delays and customer dissatisfaction. Companies should be aware of these risks and take steps to mitigate them. Companies should identify potential delays and take steps to avoid them, such as utilizing alternate routes or utilizing backup suppliers. In addition, companies should keep their customers informed of the status of their orders in order to maintain customer satisfaction.
Bottom Line
Lead times are an important part of the supply chain process and can have a significant impact on the cost and efficiency of a business. Companies should understand the different types of lead times, the factors that influence lead times, and the best practices for managing lead times. In addition, companies should be aware of the potential risks associated with lead times and take steps to mitigate them. By understanding lead times and implementing strategies to manage them, companies can ensure that their logistics operations are running as efficiently and cost-effectively as possible.
Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.
Tags: Calculators & Formulas
