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Lead time is the time from beginning a process to completing it, and it is a term commonly used in supply chains, shipping, procurement, and purchasing. An example of lead time in a supply chain is when a manufacturer might need between two weeks and eight months, depending on certain variables, to deliver new cars after the buyer places an order.
Businesses review lead time in supply chains, manufacturing, and project management during pre- and post-processing stages. Reviewing the lead time helps you realize where inefficiencies exist by comparing your results against your ideal standards.
Minimizing lead time is crucial because it streamlines operations and improves productivity, maximizing both output and revenue. On the other hand, longer lead times mean unhappy customers are waiting for their orders to arrive. Customer satisfaction depends on short lead times.
Examples of How Lead Time Affects the Supply Chain
An example of how lead time can affect different levels of the supply chain is if your supplier takes a week to deliver an order to a customer, but, the customer needs it in four days, resulting in an unhappy customer. This is an example of the purchaser not considering lead time.
Another example of how lead time affects the supply chain is when a buyer knows their company has a two-month production deadline. The buyer researches wholesale products to find a supplier with a three-and-a-half-week lead time. Having the lead time be only three and a half weeks but the production deadline be two months gives the company wiggle room to place the order, receive the products, and finish production with time to spare.
Lead Time Across the Supply Chain
For make-to-order (MTO) products, lead time is the time needed when an order is placed and when the product is made and shipped. For make-to-stock (MTS) products, lead time is the time from when the order is set to the production and receipt of finished goods inventory.
[For more information, see Make to Order vs. Make to Stock: What’s the Difference?]
Lead Time in Manufacturing
Manufacturing lead time can be defined as the period of time needed to manufacture an item. This time includes order preparation time, wait time, setup time, production run time, move time, inspection time, and even stocking time.
Manufacturing lead time simplifies manufacturing time calculations, influencing logistics and sales management.
The production lead time formula is lead time equals the pre-processing time plus the processing time plus the post-processing time. This is how to calculate lead time.
Lead Time in Inventory Management
Lead time in inventory management is the time between when an order is placed and inventory is replenished and when the order is received. Lead time affects how much stock a company needs to hold at any point. Therefore, lead times are a critical aspect of inventory management. Companies need to have a concrete understanding and command of lead time. Without this knowledge and control, there could be severe consequences, including delays and unhappy customers.
Lead Time in Logistics and Shipping
Lead time in logistics and shipping requires the shipping company to have a comprehensive knowledge of supply times throughout the supply chain. The shipping company must know the length of time it takes to manufacture items and when they will reach the warehouse. It must also know the length of time it takes to process and deliver goods to the intended customer.
Lead Time in Procurement
Lead time in procurement involves managing the lead time of raw material suppliers. This is the key to preventing production line shortages.
What Factors Can Affect Lead time?
Supplier lead time can be affected by three factors: procurement, manufacturing, and shipping. A supply chain contains many parts, and each part may influence lead time and therefore customer satisfaction.
Factor 1: Procurement
Procurement lead time factors are connected to sourcing the raw materials for manufacturing. Businesses that build solid relationships with their suppliers tend not to be as affected by these factors. Nevertheless, when depending on outside companies, there exists the risk that a lead time wavers because of an exterior failure to deliver.
Factor 2: Manufacturing
Manufacturing factors are often controllable for a business. These factors include an inefficient processing plant layout, inadequate utility or power service, insufficient laborers, and equipment failures that slow the manufacturing process.
Factor 3: Shipping
Shipping factors affecting lead time include disrupted supply chain management, choosing a slower but better-priced delivery method, failing to gather proper remittance information, mishandling shipments and preparing a safer, more secure delivery. It can also include natural conditions or weather impeding delivery.
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Lead Time Formula
The basic lead time formula is: Lead time equals the time before processing, the processing time, and the time after processing.
In manufacturing, the time before processing is the procurement stage. This pre-processing stage is when raw materials are sourced and delivered. This may also be called the material lead time. After procurement is the manufacturing. Finally, time after processing must also be considered. The post-processing time is the last stage and includes delivering the order.
One way to write the lead time formula is Lead Time for the Company = Procurement Time + Manufacturing Time + Shipping Time
A retail company won’t have to factor in manufacturing time since it does not manufacture its own goods. Additionally, the procurement time is consideredly differently because raw materials don’t have to be procured. The procurement time for a retail company is sourcing its final products to sell straight to its customers.
The formula for the lead time for a retail company is the procurement time plus the shipping time.
The Difference Between Lead Time and Related Terms
Lead Time vs. Cycle Time
Lead time can be related to, but not identical to, cycle time or takt time. Cycle time indicates the time required to make a certain product from start to finish. Order cycle time is another important key performance indicator (KPI) in production.
In the case of the order-oriented output for an order backlog, It assesses the time from when an order is first processed to the end of the last processing step of the previously processed order of the order backlog. Therefore, cycle time can be seen as the total lead time of the order backlog.
Cycle time measures the production speed of a manufacturing process, while lead time includes the entire manufacturing and production process. Therefore, cycle time is calculated from the point of view of the inside of the business. On the other hand, lead time is measured from the customer’s point of view.
Lead Time vs. Delivery Times
Lead time and delivery times are two terms that are often used interchangeably. However, lead time is a more general term. Delivery lead time is more specific and refers to the time between the initial order and its delivery.
Delivery times are usually calculated after the fact as the time between when an order was placed and when it was received. Delivery lead times can also be estimated by looking at the steps needed to complete an order and tallying how much time each sequential step is expected to take.
Lead Time vs. TAKT Time
Takt time is another supply chain metric that sometimes gets confused with lead time. Takt time is defined as the period between starting to work on one unit or product and starting the next.
“Takt” is German for “pulse.” So, just as one’s heart can beat faster or slower, a business’s takt time can become higher or lower, related to customer demand. Business leaders measure takt time to stamp out over- and under-production. This metric helps to improve quality control standards.
To obtain the data needed to calculate takt time, track net production times (NPT). NPT is the period spent producing a product or service. Divide the total NPT for a particular amount of time by the number of units buyers ordered in that period to calculate the takt time. This number illustrates the production time per unit.
[For more information, see What Is Lead Time vs. Cycle Time vs. Takt Time?]
Related Procurement Metrics and KPIs
Tracking key performance indicators in the production process is vital. Some essential KPIs related to supplier lead times include compliance rate, supplier defect rate, supplier availability, procurement ROI, purchase order accuracy, and cost per purchase order.
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