What are lead times in business? It is one of the most important but underestimated concepts in logistics. In simple words, the amount of time a supplier takes to deliver an order to its destination is called lead time. Several industries keep lead times as a key metric to judge their performance in order delivery.
In this article, you will learn the lead time’s meaning and understand lead time vs ship date. This article will also discuss how to calculate lead time and different lead time reduction strategies. Let’s begin!
Define Lead Time
People linked with shipping and supply chains often ask: What is lead time? An easy explanation of this concept is the time taken to fulfil an order from its confirmation to delivery.
Normally, there are the following three types of lead times companies have to deal with in the manufacturing industry:
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Material Lead Time
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Production Lead Time
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Customer Lead Time
Material lead time is the time it takes for suppliers to deliver the needed materials for an order. Similarly, the duration between order submission and receiving the product in stock is called production lead time. Finally, the customer lead time is how long the company takes to deliver the ordered product to the customer.
Lead Time in MTO and MTS Mode
To be more specific, customer lead time has a different meaning in make-to-order (MTO) production mode and make-to-stock (MTS) production mode. In MTO, lead time refers to the time from manufacturing to delivery, which is much longer than in MTS. In MTS, products are already produced and stored in inventory, so the lead time is very short—only the time needed for order processing and delivery.
Cumulative Lead Time
This is another term that is often used in the logistics and manufacturing industry. Cumulative lead times are the total time needed when no stock is available, including material lead times, production lead times, and customer lead times. It starts from order confirmation, includes sourcing materials and production, and ends with product delivery to the customer.
Factors Affecting Lead Time and Lead Time Reduction Strategies
Two of the main factors that can influence lead times are production processing, inventory, and shipping management.
Production Processing
When it comes to production, assembling all components of a final product at the facility may require more time than finishing some parts elsewhere. Transportation challenges can also delay the arrival of necessary parts. This results in delays in production and lowers both output and return on investment (ROI).
Utilizing locally sourced materials and workforce can reduce lead times and expedite production. And if you can use offsite subassemblies, it can further save you time. By minimizing production duration, companies can greatly increase output during peak demand periods. Faster production can boost sales, enhance customer satisfaction, and, in turn, improve the company’s revenue.
Inventory Management
It is also important to make inventory management efficient to stay ahead of production deadlines and fulfill customer demands on time. Stockouts mean the inventory is unavailable, which becomes a hurdle in a company’s ability to assemble products or complete a customer order. If a business miscalculates the required stock levels or neglects to restock materials immediately, the production stops. This proves expensive for the company and affects its profits.
One of the lead time reduction strategies is to implement a vendor-managed inventory (VMI) system, which automates stock replenishment. These systems can be managed by an external supplier, employing just-in-time (JIT) inventory practices to order and deliver components based on actual usage.
Shipping Management
Reducing shipping and delivery lead times can also greatly help businesses deliver faster, cut costs, and improve customer satisfaction:
l Plan for peak seasons and disruptions. Prepare for holiday surges by increasing stock and booking shipments early. Always have a contingency plan for unexpected delays, like port congestion or bad weather.
l Source suppliers closer to your market to reduce transit time. For international shipping, work with local freight forwarders who have wider and better carrier connections to deliver your cargo efficiently.
l Optimize packaging. Try to use standardized packaging and proper labeling to reduce sorting time and prevent misrouting or delays.
l Use faster shipping methods. Although air freight is much more expensivethan sea freight, it is still the best solution for urgent shipments. Choosing express courier services for small, high-value items.
l Prepare for customs clearance. Work closely with your freight forwarders and suppliers to make sure all documentation complies with regulations, avoiding possible customs delays.
l Make sure that inventory is stored in various regions where your customers are located. You can achieve shorter transit times this way. Nevertheless, if you are not distributing inventory through multiple fulfillment centers, longer lead times should be expected.
A Long Lead Time
A long lead time refers to a situation where a process takes a relatively extended period to complete compared to a company’s typical lead time(s) or industry standards. The actual time may differ based on the industry, the company, and the location.
There’s no specific definition of what is considered a long lead time, therefore, it is always better to get help from a supply chain expert or have a thorough understanding of the complete processes that occur throughout your operations. For example, in international cross-Pacific shipping, shipping goods via sea freight takes around 15 to 35 days, and air freight takes around 3 to 5 days, depending on specific countries.
For ground shipments within the contiguous US, a long lead time is considered to be more than one week. When an order is placed by noon local time on a business day, it will be picked, packed, and dispatched on the same day. Once the package is with the carrier, shipping across the country can take up to 7 business days via ground transportation like box trucks. As for local deliveries, they can be delivered within 1-2 days.
Importance of Lead Times in Supply Chain
Lead times differ across supply chain sources, making it difficult to predict delivery dates and align production schedules. This inconsistency can lead to surplus inventory, straining a company’s finances.
Delays can be caused by factors such as raw material shortages, natural disasters, and human errors. To prevent production stoppages, companies should have backup suppliers ready, especially for critical components. Maintaining open communication with suppliers who have adequate stock and tracking usage can also help a lot.
While stockpiling essential parts can be costly, reducing excess inventory can help control production expenses. For example, you can use kitting services to reduce inventory levels and shipping costs.
It’s important to recognize that some lead time disruptions are beyond control. However, we can mitigate these issues as far as possible and manage lead times effectively.
Lead Time Calculation
After a detailed overview of lead time’s meaning and importance in the supply chain, it is now time to see how to calculate lead time. We can divide lead times into a number of different components.
These include the pre-processing components, the processing components, and the post-processing components. Although these components may be described or categorized in various ways, the following equation is generally used to determine lead time:
Lead Time = Pre-Processing Time + Processing Time + Post-Processing Time
In the context of a manufacturing business, pre-processing time refers to the procurement phase in which raw materials are acquired and transported to the company’s manufacturing facility or processing site. The time taken during the production phase is called the processing time. As for the post-processing time, it involves the phase in which the order is finalized and the finished product is delivered to the customer.
Lead Time for Manufacturing Company = Procurement Time (for raw materials) + Manufacturing Time + Shipping Time
There is no manufacturing time for retail businesses since they do not make their own products. The procurement time also varies because retail companies acquire the finished products and sell them directly to consumers instead of sourcing raw materials.
Lead time vs Ship date
One concept that is often confused with lead time is the ship date. Ship date refers to the date when the order is sent out from the seller’s warehouse to the customer, marking the start of the delivery phase within the overall lead times.
Conclusion
Lead time is an important factor, especially in the manufacturing industry, if a company needs to ensure on-time delivery of orders and customer satisfaction. Material lead times, production lead times, and customer lead times are the three major types of lead times that you should understand. There is no fixed formula for calculating lead time, but you can always reduce it by optimizing production, inventory, and shipping.
FAQs
What is lead time?
The time taken to fulfill an order from its confirmation to delivery is called lead time.
How many types of Lead Times are there?
There are three major types of lead times: material lead time, production lead time, and customer lead time.
How is lead time calculated?
In general, the formula for lead time is as follows:
Lead Time = Pre-Processing Time + Processing Time + Post-Processing Time
