What is 'Lead Time'

Lead time is the amount of time that passes between the commencement and the end of a process. Manufacturing, supply chain management, and project management scrutinize lead time to reduce the time between conception and finalization of a project. Companies review pre-processing, processing, and post-processing data,  comparing each result against benchmarks to determine where inefficiencies.

BREAKING DOWN 'Lead Time'

Lead time reduction streamlines operations and improves productivity, increasing a company’s output and revenue. In contrast, longer lead times negatively affect sales and manufacturing processes. Many issues affect a company’s lead time.

How Lead Time Affects Inventory

Stock-outs, as the name implies, occur when inventory, or stock, to fulfill a customer's order is unavailable.  As a result, stock-outs adversely affect consumer demand and manufacturing schedules. Consider an example in which an organization's management either underestimated the amount of stock needed or failed to place a replenishment order. Because suppliers cannot replenish materials immediately, production stops, which can be costly for the 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.

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. Supply chain failures affect non-production due to stock-outs, further straining revenue. A VMI program helps consolidate information about suppliers that store the required components and will ship them as needed. 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 due to unanticipated events.

Disorganization in inventory will increase lead time. Stockpiling necessary parts may be cost-prohibitive. Reducing the number of surplus parts also helps place a ceiling on production costs. One solution is for companies to use kitting services in the organization of their inventory. With kitting service, 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.

How Lead Time Affects Production

Building all elements of a finished product onsite may take longer than completing some items offsite. Delays in transportation and production reduce output and return on investment (ROI). Avoidance of extended shipping lead time by using localized parts and labor speeds production. Offsite sub-assemblies may save hours in comparison to full onsite production. Reductions in production time will allow a company to increase production in less time during times of high demand. Quicker production can increase sales, customer satisfaction, and the company’s bottom line

Also, the offsite assembly may be cost-effective in avoiding tariffs. As an example, U.S. automakers will produce some of the necessary components for cars sold in China in Chinese factories. This in-country production stage allows them to avoid the 25% tariff on imported American cars.

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