What Is Purchase Order Lead Time? Definition and How It Works

What Is a Purchase Order Lead Time (POLT)?

The term purchase order lead time (POLT) refers to the number of days it takes between the time that a company orders production inputs and the time those items arrive at the manufacturing plant. Put simply, a purchase order lead time is the estimated time it takes to receive an order after it is placed. POLTs vary between companies and industries, so no two experience the same time. This means the timeframe depends on many factors, including the types of goods required and the time of year.

Understanding Purchase Order Lead Times (POLTs)

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. This timeframe is heavily influenced by a number of factors, including the types of goods required by the company, the availability of materials, where they come from, the location of the suppliers, and even the time of year.

The POLT includes a number of different steps, including the:

• Confirmation of the order
• Availability of the goods
• Order placement
• Acknowledgment of the order
• Shipping notice
• Receipt of the goods
• Invoicing
• Payment

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. This can also 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 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 the order placement process.

Special Considerations

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. For instance:

• If supplies are ordered on a Friday afternoon, the order may not be received 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 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 may want to avoid unnecessary storage costs, they may choose to keep a buffer supply on hand to protect against shipment delays.

The visibility of real-time inventory levels of raw materials is enabled by online software connections between manufacturers and suppliers 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. Many manufacturers may also employ a production strategy called Just-in-Time (JIT) manufacturing, This process aligns orders with corporate production schedules, thereby reducing wait times and waste.