Lead time refers to the period between a project’s initiation and its completion. However, the project’s start and end differ from situation to situation and is thus defined by the industry and context of the process. The lead time for a manufacturing company might include the steps from the procurement of the raw materials, production, quality control, and packaging, to the dispatching of the finished product, whereas project management might define lead time by the length it takes to complete a specific task. This article will delve into all aspects concerning lead time – the lead time definition, the different lead time types, how to calculate lead time, how it’s used, as well as different lead time examples.
What is Lead Time?
Here is Intuendi’s lead time definition: Lead time represents the total time required to process, produce, and deliver a product or service. As previously established, the parameters of a company’s lead time is largely defined by the industry it falls into, and can vary significantly depending on the complexity of the product or service, as well as the specific circumstances of the order.
However, the goal with lead time in business is fairly similar across the multiple contexts it can find itself in – to reduce it and keep it as minimized as possible. Reducing one’s lead time can result in streamlined operations, improved productivity and increased output. The leading time is an important consideration for businesses and customers alike, as it affects planning, inventory management, and customer satisfaction. Longer lead times can result in increased costs, inventory holding expenses, and potential delays in meeting customer demands.
With the improved supply chain management that a decreased lead time brings, larger goals can be achieved such as the ultimate boosting of revenue. A shorter lead time allows for a competitive advantage, encouraging customer loyalty that all companies should strive towards.
What are the Types of Lead Time?
What is the lead time in business? With the long list of reduced lead time benefits in mind, let us take a look at the different types of lead times that can be found across the supply chain management world.
Manufacturing lead time: Looking at our previous example of lead time in the manufacturing industry, manufacturing lead time refers to the time required to complete the production process for a product. This generally begins at the procurement process and continues to the point of shipment. Resource availability and complexity of the product or service can significantly impact the time it takes for it to reach completion and delivery.
The different steps and processes that occur between initiation and completion can further be broken down into their lead times, with their own definitions, demonstrating the multiple uses of lead time in the supply chain.
Transportation lead time: Transportation lead time represents the time it takes for goods to be transported from one location to another, generally looking at how long it takes for a shipment to reach its destination from its point of origin. This takes external factors such as loading and unloading and customs clearance into consideration. This is heavily dependent on distance, the mode of transportation used, traffic conditions, as well as the efficiency of the logistics provider. With multiple impacting factors often being out of the company’s control, it is imperative that their internal management systems are kept up to scratch and are constantly being improved upon.
Procurement lead time: Refers to the time required to source and procure the necessary materials, components, or services for production. Procurement lead time includes activities such as identifying suppliers, requesting quotations, negotiating contracts, placing orders, and receiving goods or services. The factors influencing the length of procurement lead time include supplier lead times, availability of resources, negotiation processes, as well as any specific procurement policies or procedures that are set in place.
Order lead time: Order lead time, or order fulfillment lead time, or order processing time, can be described as the time it takes from the customer’s order placement to the point when the order is ready for delivery or pickup. Have a look at Intuendi’s Fill Rate article for a more in-depth study of how order lead time works, and how it is calculated. Order lead time encompasses all the activities involved in processing the order, such as order entry, verification, picking, packing, and preparing the order for shipment.
How to Calculate Lead Time?
Through exploring the different types of lead times, it is clear that there are different phases or steps within what is considered to be lead time. These can be broken down into the pre-processing, processing, and post-processing phases. However you may define or state them, they form the bulk of the lead time calculation:
Lead Time = Pre-Processing Time + Processing Time + Post-Processing Time
In essence, the lead time calculation is the basic sum of all components from initiation of the order, to completion of the order. It is, however, important to note that different industries will define the different steps in accordance with what they consist of. Each phase is therefore adjusted or redefined to better suit its context. Here are two examples:
Manufacturing Lead Time = Procurement Time + Manufacturing Time + Shipping Time
Retail Company Lead Time = Procurement Time + Shipping Time
How do you use Lead Time?
Leading time is used to assess how long a company takes to complete an order, which may aid in indicating weaker and stronger points within the entire process. There are, therefore, several ways in which it can be used.
- Production Planning: By accurately estimating lead times, businesses can determine when to start production in order to meet customer demand in an efficient and timeous manner. Having this scheduling information allows for accurate planning of production activities, allocating resources, and coordinating with suppliers.
- Inventory Management: Estimating lead times can help accurately inform the amount of inventory needed to meet customer demand within a certain lead time period. Proper inventory management prevents stock-outs and excess inventory, which ultimately leads to a loss of revenue. This can also be improved upon with demand forecasting software. Click on these links for more explanation on proper inventory management!
- Customer Satisfaction: As is the case with any type of business, customer satisfaction sits at the peak of importance. Lead time can be used to improve customer satisfaction through proper management of the combination of the previous points. With accurate delivery estimates that allow for realistic customer expectations, companies are able to meet or even exceed these expectations, generating improved customer satisfaction, repeat business, and positive word-of-mouth recommendations.
Examples of Lead Time
Let us look at a lead time example of a small woodworking company:
Woodwork Inc. is tasked with manufacturing a custom-made dining table, which they have set an estimated lead time of 4 weeks. If the order was placed on 1 May 2023, this gives the company until 31 May 2023 to complete the order.
By referencing the manufacturing lead time calculation, the lead time includes the procurement of raw materials, the actual manufacturing, as well as shipping. The lead time estimation helps the company plan their production schedule, allocate resources, and manage inventory levels. It also allows them to provide the customer with an estimated delivery date, helping set expectations and managing customer expectations.
Let us examine a 2nd lead time example and forecast variability:
It’s Monday morning and you have just placed an order of 300 boxes of your top-selling product. Delivery is expected for tomorrow, and today you are left with your current inventory of 25 units to satisfy demand. Luckily, your top-of-the-range demand forecasting tool has estimated a likely demand of exactly 25 units! Perhaps you should reconsider… while your demand forecasting tool was designed to extract all of the available information to assist in planning, numbers should be both read and interpreted.
Perhaps your demand forecasting tool has informed a demand of 25, but the probability of a demand of 24 or even 26 units is just as likely. Should this be the case, you have opened your business up to a 33% chance of an unsatisfied customer, a risk you should not be willing to take. When variability is not taken into account, the risk of stockout, and a dissatisfied customer, increases!
Let us look at another practical example of lead time being utilized in which neither demand planning nor variability were adequately considered:
Your company’s lead time is 2 days, with a predicted demand of 25 inventory items per day. You have chosen to keep a stock-count of 50. It is important to ask yourself what should happen if you sell between 23 to 27 units instead of the predicted 25. This is called elementary probability and gives you a stockout probability of around 40%.
But how much stockout should you expect? It is unlikely that your demand will fall above average on both days, teaching a very important lesson about planning in advance. Do not base your inventory management decisions purely on what you have forecasted, be sure to factor in variability. And when your lead time increases, so do the risks.
Why is Lead Time Important?
Leading time is a critical factor in providing insights into how long a product’s production and shipment will take and can be adjusted to meet the specifications and requirements of any company in any industry. Through improved inventory management and the opportunity it provides in setting realistic customer expectations, estimating your lead time brings increased customer satisfaction, supplier selection, and overall business functions. The lead time provides valuable insights into inventory levels and the amount of resources needed to complete a project without running into issues of stock-outs or excess inventory. Having shorter lead times offers companies a competitive edge, attracting customers and increasing profitability. However you might define lead time, recognizing its importance and leveraging it as a strategic metric in lead time analysis, businesses can drive customer satisfaction, operational excellence, and long-term success in the fast-paced and demanding marketplace of today!
See how Intuendi’s demand planning software can help you track and measure your lead times: