What Is Purchase Order Lead Time (POLT)?
Purchase order lead time (POLT) refers to 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. Put simply, a POLT is the estimated time in which it takes to receive an order after it's placed. Purchase order lead times vary from company to company and from industry to industry, and depend on many factors such as the types of goods or materials being ordered, their relative abundance or scarcity, where the suppliers are located, and even the time of year.
- Purchase order lead time is the number of days from when a company places an order for supplies, to when those items arrive.
- The POLT depends on the types of supplies ordered, their relative abundance or scarcity, where the suppliers are located, and even the time of year.
- Companies must carefully plan purchase order lead times when planning a manufacturing run.
- Companies can cut down on order times by increasing the number or orders, changing suppliers, and automating the order process.
Understanding Purchase Order Lead Time
As mentioned above, the purchase order lead time is how long it takes for an order to be fulfilled—from the time the order is placed until the estimated date of receipt. So if a company places an order for supplies on May 1 and it's expected to be delivered on May 10, the POLT for the supplies is nine days. The POLT includes a number of different steps including the confirmation of the order, availability of the goods, the order placement, acknowledgement of the order, the shipping notice, receipt of the goods, invoicing, and payments.
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.
For this reason, managers need to plan as precisely as possible when they need to order the materials needed, lest they incur additional overhead. If they have a trusted supply chain, this should be one of the first items added to a production and/or staffing calendar.
There are ways companies can reduce the number of days in a POLT:
- Increasing the number of orders. This is a better option compared to putting in one or two large orders. By doing so, companies can save both time and money, and can ensure they don't have too much of a certain supply, while maintaining enough stock to keep fulfilling orders.
- Changing suppliers. Using local or domestic suppliers over international ones may help cut down on lead times, which, again, can save on time and money.
- Automating the order process. By moving to a system that automatically places and fulfills orders, companies can free up manpower for other tasks, and personnel can have more time to do their jobs. Automation also helps cut back on any possibility of error when it comes to order placement.
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, the order may not be until Monday, 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 has to source the materials from somewhere else before it ships to the customer.
If the inputs are coming from far away, the manufacturer must be aware of the possibility of a delay.
If there is high seasonal demand for a particular raw material, that may affect whether supplies are received in a timely fashion. Even though a producer would like to avoid unnecessary storage costs, they 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.