What Is Lead Time?
Lead time is the amount of time that passes from the start of a process until its conclusion. Companies review lead time in manufacturing, supply chain management, and project management during pre-processing, processing, and post-processing stages. By comparing results against established benchmarks, they can determine where inefficiencies exist.
Reducing lead time can streamline operations and improve productivity, increasing output and revenue. By contrast, longer lead times negatively affect sales and manufacturing processes.
Key Takeaways
- Lead time measures how long it takes to complete a process from beginning to end.
- In manufacturing, lead time often represents the time it takes to create a product and deliver it to a consumer.
- Lead time is calculated by adding any combination of the number of days to procure materials, manufacture goods, and deliver finished products.
- Factors that can impact lead time include lack of raw materials, transportation breakdowns, labor shortages, natural disasters, and human errors.
- Companies can improve lead times by implementing automated stock replenishment and just-in-time (JIT) strategies.
Understanding Lead Time
Production processes and inventory management can affect lead time. Building all elements of a finished product onsite may take longer than completing some items offsite. Transportation issues can delay delivery of necessary parts, halting or slowing production and reducing output and return on investment (ROI).
Using locally sourced parts and labor can shorten lead time and speed production, and offsite sub-assemblies can save additional time. Reducing production time allows companies to increase production during periods of high demand. Quicker production can increase sales, customer satisfaction, and the company’s bottom line.
Efficient inventory management is necessary to maintain production schedules and meet consumer demand. Stockouts occur when inventory is unavailable, preventing the fulfillment of a customer’s order or product assembly. Production stops if an organization underestimates the amount of stock needed or fails to place a replenishment order and suppliers cannot replenish materials immediately. This can be costly for a company’s bottom line.
One solution is to use a vendor-managed inventory (VMI) program, which provides automated stock replenishment. These programs often come from an off-site supplier, using just-in-time (JIT) inventory management for ordering and delivering components based on usage.
A great example of lead time is the time needed to process a passport. If you’re planning on traveling internationally, prepare to get your passport renewed months in advance of your trip; the government estimates the lead time for routine passport processing as six to eight weeks.
How to Calculate Lead Time
Lead time can be broken into several different components: the pre-processing, the processing, and the post-processing stages. These may be defined or stated differently, but the general formula to calculate lead time is:
Lead Time = Pre-Processing Time + Processing Time + Post-Processing Time
Manufacturing Company Example
For a manufacturing company, the pre-processing time is the procurement stage where raw materials are sourced and delivered to its manufacturing headquarters. The processing time is the manufacturing stage. The post-processing time is the stage of processing the order and delivering the final good to the customer.
Lead Time for Manufacturing Company = Procurement Time (for raw materials) + Manufacturing Time + Shipping Time
Retail Company Example
For a retail company, there is no manufacturing time as the retail firm does not manufacture its own goods. The procurement time is different as instead of procuring raw materials, it sources final products to then sell directly to customers.
Lead Time for Retail Company = Procurement Time (for final products) + Shipping Time
Lead Time and Supply Chain
The lead time varies among supply chain sources, causing difficulty in predicting when to expect the delivery of items and coordinating production. Frequently, the result is excess inventory, which places a strain on a company’s budget.
Lead time scheduling allows for the receipt of necessary components to arrive together and reduces shipping and receiving costs. Some lead time delays cannot be anticipated. Shipping obstructions due to raw material shortages, natural disasters, human error, and other uncontrollable issues will affect lead time. For critical parts, a company may employ a backup supplier to maintain production. Working with a supplier who keeps inventory on hand while continuously monitoring a company’s usage helps alleviate the issues resulting from unanticipated events.
Stockpiling necessary parts may be cost-prohibitive, but reducing the number of surplus parts also helps place a ceiling on production costs. One solution is for companies to use kitting services to organize their inventory. With kitting services, inventory items are grouped based on their specific use in the project. Workers save time choosing from smaller lots of parts, keeping production more organized and efficient.
Using offsite assembly in overseas markets instead of shipping completed goods can help companies save money on tariffs.
The Importance of Short Lead Time
Short lead time is important as it impacts the financial, emotional, and operational aspects of a company and its relationship with its customers. Several specific examples of the importance of short lead time include:
- Shorter lead time may lead to happier customers. Customers who receive their products quickly are more likely to be satisfied, fostering greater customer loyalty and positive reviews.
- Shorter lead time may lead to less obsolescence. Goods with long lead times run the risk of becoming obsolete by the time they are manufactured. Shorter lead times reduce this risk, ensuring products are in demand when they reach the market.
- Shorter lead time may lead to reduced labor costs. By identifying and eliminating inefficiencies, companies can cut down unnecessary labor hours, saving on overhead costs and utilizing worker time more effectively.
- Shorter lead time may lead to more orders. Companies with shorter lead times are more competitive and likely to attract more customers, especially if demand for their product is high.
- Shorter lead time may lead to more efficient capital deployment. Reducing the time capital is tied up in inventory allows companies to use their resources more effectively for growth and expansion.
How to Reduce Lead Time
Here are several strategies to reduce lead time and streamline processes:
- Eliminate Unnecessary Processes. Trim lead time by removing steps not needed to facilitate a sale, such as multiple quality control reviews or redundant processes.
- Monitor Transportation Methods. Regularly review transportation options to find the most efficient and reliable methods, adjusting as needed due to labor shortages, natural disasters, or policy changes.
- Incentivize Better Service. Set clear targets and expectations for suppliers and staff, offering rewards for meeting these goals to encourage faster service and better performance.
- Procure Differently. Evaluate suppliers based on promptness and proximity, choosing local suppliers where applicable to shorten procurement times.
- Carry Higher Inventory. Balance the costs and risks of holding more inventory against the benefit of reducing lead time by having stock readily available.
- Reorder More Often. Place more frequent smaller orders to ensure materials are always en route, reducing the time waiting for stock to arrive.
- Promote Internal Learning. Invest in cross-training and educational opportunities for staff to increase their expertise and strengthen labor capabilities, leading to more efficient production processes.
Types of Lead Time
Lean and optimize your processes by understanding the different types of lead times and how they interact.
Customer Lead Time
This is the amount of time between when a customer places an order and when the customer receives the product. It encompasses order placement, manufacturing, shipping, and delivery.
Material Lead Time
This is the time between when a company identifies the need for raw materials and when those materials are received. It covers order notification, processing, supplier fulfillment, shipping, and delivery.
Production Lead Time
This is the time required to manufacture a product once all necessary materials are on hand. It involves internal factors like labor efficiency, equipment functionality, and process optimization.
Cumulative Lead Time
This is an aggregate measure of all lead times, including procurement, manufacturing, and delivery. Understanding cumulative lead time helps identify improvement opportunities across the entire production process.
Factors That Affect Lead Time
Procurement Lead Time Factors
Factors affecting procurement lead time include awareness of material needs, prompt submission of purchase requests, vendor selection, negotiation, and thorough inspection of delivered goods.
Manufacturing Lead Time Factors
Inefficiencies in plant layout, labor shortages, government regulations, equipment failure, and the need for specialized parts can extend manufacturing lead times.
Shipping Lead Time Factors
Shipping lead times can be influenced by transportation methods, natural conditions, remittance information accuracy, and external supply chain disruptions.
Example of Lead Time
Imagine a large festival attracting 100,000 attendees, typically selling 15,000 T-shirts. The T-shirt vendor needs one business day to design the shirt, one day for approval, one day to print, and two days to ship. The lead time totals five business days. If shirt sales surpass expectations, ordering more on the second day and requesting overnight shipping can reduce the lead time to three days.
Conclusion
Lead time is a critical metric in business that signifies how long it takes to complete a process from beginning to end. By understanding and optimizing lead time, companies can reduce costs, improve efficiency, and increase customer satisfaction. Shorter lead times align closely with better resource management and operational efficiency, driving overall business success.
References
- U.S. Department of State, Bureau of Consular Affairs. “Get Your Processing Time”.
