What is Purchase Order Lead Time
Purchase order lead time is the number of days from when a company places an order for production inputs it needs to when those items arrive at the manufacturing plant. Purchase order lead times vary from company to company and from industry to industry, depending on the types of goods or materials being ordered, their relative abundance or scarcity, where the suppliers are located, and even the time of year.
BREAKING DOWN Purchase Order Lead Time
Companies must carefully plan purchase order lead times when planning a manufacturing run because if production inputs do not arrive on schedule, manufacturing will be delayed, costing the company money in lost sales, idle worker time and lower factory overhead absorption. On the other hand, if inputs arrive too early, the company could incur additional inventory storage costs.
Considerations of Purchase Order Lead Time
A company can set up a two-bin inventory control system, which can largely automate the reordering process for small or low-value items or materials. For more important inputs, a company must keep in mind not only the shipment time but the order processing time as well. If supplies are ordered on Friday afternoon, it may not be until Monday when the order is processed, which means a loss of two days. If raw materials are in scarce supply, a manufacturer may not receive the desired quantity and they may not arrive on time if the supplier first has to source the materials elsewhere before it ships to the customer. If the inputs are coming from far away, the manufacturer must be aware of the possibility of delay.
Also, if there is high seasonal demand for a particular raw material, that may be a factor in receiving the supplies in a timely fashion. Even though a producer would like to avoid unnecessary storage costs, it might choose to keep a buffer supply anyway to protect against shipment delays. Visibility of real-time inventory levels of raw materials is enabled by online software connections between manufacturer and supplier who care about supply chain logistics. The more the buyer communicates its forward needs by providing demand forecasts to the seller, the more accurate the order lead times will be.