Lead Time is the time taken from the moment an order is placed, till the moment it is delivered to the customer.
The terminology ‘Lead time’ is commonly used in many fields like Manufacturing, Supply chain Management, Project Management, Supplier Management, Material Requirement Planning & Enterprise Requirement Planning (MRP & ERP), Software development and so on.
Ideally, every business has a Lead time. The interpretation of ‘Lead Time’ differs in each field depending on the nature of operations.
Let’s explore a few interpretations of ‘Lead Time’
In Supply Chain Management, Lead time is the duration from when the order is received till goods are delivered to the customer.
In New Product development, Lead time is the time taken for a product to reach the market.
In HRD (Human Resources Development), there is a lead time for recruitment of resources to the organization.
Lead Time is definitely a buzz word in today’s fast paced world.
Why is ‘Lead Time’ given so much importance?
The reason is simple. As the old saying: “Time is Money”.
An example is due…
Imagine a steel container manufacturer who makes containers of different sizes for his customers. The key raw material for his business is ‘Steel’, which is procured from his suppliers. If the supplier has a Lead time of 1 month to deliver the ordered quantity of steel, the manufacturer needs to maintain a stock equivalent to one month’s order as Inventory, in order to start production without waiting for the raw materials.
Inventory triggers storage cost. Higher the Lead Time, higher is the inventory. Ultimately, he will try to find a supplier who has the least lead time.
Another reason is: Higher the Lead time, more accurate the demand forecast should be. If the Lead time is less, say one or two days and when the demand exceeds forecast, the delivery of the product may get delayed by a day or two. In the same scenario, if the lead time is one month, then the delivery of product to customers will be delayed by a whole month, which will cause high customer dissatisfaction.
Delay in order fulfillment is relatively less, when lead time is less.
So, an accurate forecast is necessary in such cases. Many companies have a very robust supplier management system. They rate the suppliers and maintain back-ups in order to suffice for any fall short of inventory at the right time.
To summarize, Lead time is very critical because:
- Higher Lead time leads to increase in inventory
- Lead time has an important role in Demand forecast
- Lead time has a direct impact on customer Satisfaction; it makes your clients look for alternatives.
- Lead time provides a competitive edge for Product Manufacturing companies.
To manage Lead time in a beneficial way, one needs to understand the components of Lead time. The components of Lead Time are an accumulation of all the Cycle Time (also referred as Lead Time in some industry) in each department. For E.g., Customer Service – receiving requests from customers at a call center or a branch and then followed by other subsequent departments receiving the request and processing the request in a pre-defined forecasted time (Cycle Time).
Components of Lead Time
Lead Time = Preprocessing Time + Processing time + Waiting time + Transportation time + Storage time + Inspection time
- Preprocessing time: Time taken for receiving the Request, understanding the request and creating a Purchase order
- Processing Time: Time taken to produce or procure the item
- Waiting Time: Amount of time the item is in queue waiting for production
- Transportation Time: Time the item is in transit to reach the customer
- Storage time: Time the item is waiting at warehouse or factory
- Inspection time: Time taken for checking the product for any non-conformity
While calculating the lead time, one must assume that there is zero inventory/WIP and include the time taken for replenishment of Inventory in Lead time duration. While practically this may not be visible to customer’s eyes, it is useful to forecast the demand, help to reduce WIP and move towards JIT (Just in Time Manufacturing).
Having known the components of Lead time, how do we use it to reduce the Lead Time and reap the benefits?
Lead Time Reduction
- Reduce Non-Value Added Activities: Perform a Value Stream Mapping to identify the list of Non-value added activities that can be eliminated or reduced.
- Simplification of Parts: Simplification of sub parts that can be used for multiple parts will reduce the complexity and hence reduce lead time.
- Machine Layout: Arranging or ordering the machinery in a way such that transportation and movement of processed goods is reduced.
- Standard Operations: Standardizing the operational procedures and documenting will help reduce confusion among staff and help easy learning and improve consistency in production.
- Set up time Reduction: Set up time of machinery is one of the crucial tasks, which delays the subsequent tasks. Reduction of this task, helps in reducing the processing time
- Total Planned Maintenance: Unpredictable down-time is a huge disaster, no matter how efficient the operations are. Therefore frequent planned maintenance of machinery helps in avoiding this risk.
- Supplier Relationship and Performance Management: Identifying a pool of suppliers with back up arrangements, scoring them, and providing feedback at appropriate intervals is an important task. Many leading manufacturers treat suppliers as their extended organization and educate suppliers on key processes, so that they get to know the importance of their product in the value flow.
Customers are more inclined towards any Product or Service which has lesser Lead Time. It is therefore imperative for any industry to keep improving their Lead Time to stay in LEAD in the market.
To conclude, we can confidently claim that any industry that gives more importance to Lead Time and work towards improving it can envision success in his business.