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.
- 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.
- Factors that can impact lead time include lack of raw materials, breakdown of transportation, labor shortages, natural disasters, and human errors.
- In some cases, companies can improve lead times by implementing automated stock replenishment and just-in-time (JIT) strategies.
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Understanding Lead Time
Production processes and inventory management can affect lead time. In regards to production, 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, or stock, 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.
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.
Example of Lead Time
Imagine a large festival that takes place during the first week of August every year that attracts 100,000 people on average and typically sells 15,000 festival T-shirts. The vendor that supplies the T-shirts needs one business day to complete the shirt design, one business day to have it proofed and make any necessary fixes, one business day to print the shirts, and two business days to ship the items. The lead time in this example would be five business days. In other words, the festival organizers need to place their order with the T-shirt supplier at least five business days before the opening of the festival in order to get the shirts on time.
Of course, that lead time can be shortened in some extreme situations if the buyer is willing to pay a premium. If T-shirt sales on the first day of the festival exceed expectations, festival organizers may decide to order additional shirts on the second day with the hope that they can be delivered by the third day. Since the shirts have already been designed and approved, that means five days of lead time can be reduced to three. To meet that shortened lead time, the vendor would need to print the additional shirts as quickly as possible in order to ship them overnight for delivery the following morning.
Additional factors can affect lead time in this example. If festival organizers want a certain percentage of the T-shirts to be fuchsia and the vendor does not regularly keep fuchsia T-shirts in stock, that can increase the lead time because the vendor will need to order shirts in that color.