Long lead times can hurt sales and diminish customer retention. If a customer has to wait an extra day for their order, they might decide to cancel it. If a manufacturer has to wait an extra day for raw materials to arrive, they might lose a customer.
Here we break down what lead time is, the types of lead times in supply chain management, the factors that affect lead time, and how to shorten lead times to provide a better customer experience. Let’s dive in.
What is lead time?
Lead time is the total amount of time it takes to complete a process. In manufacturing, for example, lead time refers to the amount of time it takes for a product to move through the entire production process, from when the initial order or request was made to the final delivery.
There are many definitions for lead time in supply chain management. For customers, it can mean the time it takes to receive an order after they have purchased it. For product sellers, it can refer to how long it takes to receive raw materials or bulk products after placing a purchase order with a supplier.
Lead time includes both the time it takes to complete the standard process tasks and any delays that might occur due to various factors, such as supply chain disruptions, machine downtime, or unexpected quality issues.
In a survey of 1,000 organisations, 74% of respondents in the US reported delays in shipping and longer lead times during the coronavirus pandemic. Lead time is a vital business metric that directly impacts customer satisfaction, workflow efficiency, and delivery time accuracy.
Long lead time vs short lead time
Long lead time occurs when a process takes a relatively significant amount of time to complete once it has started. Many factors can produce longer lead times. In manufacturing, inefficient production processes, scarcity of raw materials, or complicated designs can all result in longer lead times.
On the other hand, a short lead time means that a process can be completed relatively quickly. Short lead times are often associated with optimised processes, efficient supply chains, and readily available materials.
The distinction between long lead time and short lead time boils down to how long a process takes to complete from start to finish. Short lead times generally indicate fewer bottlenecks and greater operational efficiency, while long lead times indicate opportunities to fix or remove inefficient workflows and tactics.
Lead time vs cycle time
Lead time and cycle time are both important concepts in manufacturing and business operations, but they focus on different aspects of the production process. Lead time refers to the total time it takes to complete an entire process. Cycle time is the time it takes to complete one cycle of a manufacturing task or process.
Cycle time is narrower in scope compared to lead time and usually relates to individual tasks within the broader production process. It's a valuable metric for identifying bottlenecks, improving efficiency, and optimising specific operational steps.
How to calculate lead time
You can calculate lead time by subtracting the date when the order was placed by the customer from the date of the delivery. Capturing this metric and continuing to measure it will help you to understand how long or short your lead times are, highlighting processes that require attention and optimisation.
Lead time formula
Several formulas can be used to calculate the different types of lead time in supply chain management. Here are a few of the most useful ones.
- Lead time formula for order fulfilment:
Order Delivered Date – Order Received Date = Order Lead Time
- Lead time formula for production:
Production Time + Procurement Time + Shipping Time = Production Lead Time
- Lead time formula for inventory management:
Supply Delay + Reordering Delay = Inventory Lead Time
If you’re trying to measure a specific process not listed above and you’re unsure which lead time formula to use, a general rule of thumb is to subtract the start time from the time the process is completed. We can call this the generic lead time formula.
- Generic lead time formula:
Process Completed Date – Process Started Date = Lead Time
Types of lead time in supply chain
Supply chain management is the collaborative effort of dozens of processes working to meet customer demand for products. It includes everything from the procurement of raw materials to production, inventory management, and shipping. Consequently, there are numerous types of lead time we can measure in the supply chain.
Let’s break down the most common ones.
Production lead time
Production lead time, also known as manufacturing lead time, is the duration it takes to complete the manufacturing process required to produce a finished good.
Production lead time considers multiple steps in the production process, including:
- Planning
- Sourcing raw materials
- Manufacturing
- Quality control
- Assembly
- Delivery
Production lead time factors in the time spent on the physical manufacturing steps and also any potential delays that might arise. Essentially, it represents the time it takes to transform raw materials into a fully finished and quality-assured product.
Managing and optimising production lead time involves balancing factors like production capacity, inventory levels, and operational efficiency to achieve the desired lead time while delivering items of high quality.
Delivery lead time
Delivery lead time focuses on the time it takes for a product to move through the distribution and transportation processes until it is delivered to the end customer.
The stages of delivery lead time can include:
- Packing
- Scheduling transportation
- Transit
- Customs clearance
- Delivery delays
Even large operators continually look to improve delivery lead times. Amazon recently announced it was revamping delivery operations in an effort to cut costs while accelerating shipping times to next-day delivery or sooner.
The goal in managing delivery lead time is to ensure that products reach customers within the timeframe that aligns with their purchase expectations. This involves coordinating logistics, optimising transportation routes, and addressing any potential obstacles that could extend the delivery timeline.
Order lead time
Order lead time refers to the time it takes from when a customer places an order until the time that the order is delivered in full.
Order lead time encompasses:
- Order processing
- Production
- Inventory management
- Order fulfilment
- Logistics planning
- Transportation
- Managing supply chain disruptions
Managing order lead time effectively is key to meeting customer expectations and maintaining a competitive edge. Businesses need to balance their production capacity, inventory levels, and distribution network while minimising any disruptions that could extend the lead time.
Material lead time
Material lead time refers to the duration it takes for the necessary raw materials or components to be sourced, procured, and delivered to a manufacturing facility or production line so that the manufacturing process can begin. It is the time interval between the initiation of a material order and the moment those materials are ready for use in the production process.
Material lead time can include activities such as:
- Placing orders with suppliers
- Processing purchase orders
- Transporting materials to the production site
- Inspecting or preparing the materials for use
Material lead times in the US stretched to new highs in 2022. Data reveals the average material lead time was 100 days – the longest ever recorded since records began in 1987.
Material lead time is a critical consideration in production planning and scheduling, as delays in obtaining materials can directly impact the overall manufacturing timeline and the ability to complete orders on time. Effectively managing material lead time involves coordinating with suppliers, maintaining accurate inventory levels, and implementing strategies to mitigate potential delays.
By optimising material lead time, businesses can ensure a smoother and more efficient production process while minimising disruptions and maintaining consistent product availability.
Cumulative lead time
Cumulative lead time is the total amount of time it takes for a product to move through all the stages of the production process, from the initial order or request until the time a finished product is delivered.
Cumulative lead time is a measurement that considers time spent on:
- Manufacturing
- Procurement of materials
- Production
- Quality control
- Transportation
- Supply chain risk mitigation
Unlike the types of lead time in a supply chain that focus on specific aspects such as material procurement or manufacturing, cumulative lead time takes a holistic view of the entire end-to-end process. It encompasses all the interconnected steps involved in transforming raw materials into a final product ready for delivery.
Factors affecting lead time in the supply chain
Lead time in the supply chain can be influenced by a variety of factors that impact the time it takes to fulfil an order or deliver a product. These determinants can vary depending on the specific industry, company practices, and external circumstances.
Some of the key factors that can affect lead time include:
- Supplier availability: The time it takes for suppliers to provide necessary raw materials or components can significantly affect lead time. Delays in receiving materials can lead to longer production cycles.
- Production processes: The complexity of the manufacturing process, the number of steps involved, and the efficiency of production equipment can impact how long it takes to produce a product.
- Inventory levels: If a company doesn't have sufficient inventory on hand, it can cause bottlenecks in production and fulfilment that extend lead times.
- Transportation and logistics: The time it takes to transport materials and finished products can be influenced by transportation modes, distance, customs procedures, and disruptions like traffic or weather.
- Capacity utilisation: If production facilities are running at full capacity or the capacity is not being efficiently utilised, lead times can suffer as a result.
- Quality control: Thorough quality checks and inspections can increase lead time, but they are essential to ensure the final product meets the required standards. Conversely, reverse logistics (management of returns and refunds) can equally hurt your lead times as a result of poor quality control.
- Supplier reliability: The reliability of suppliers to deliver materials on time can significantly impact lead time. Unreliable suppliers can lead to delays in production.
- Customisation: Customised or made-to-order products often have longer lead times due to the need for specific configurations or modifications.
- Demand variability: Fluctuations in customer demand can affect lead time, as higher demand may require increased production efforts.
- Seasonality: Some industries experience seasonal demand variations, which can impact lead time as manufacturers adjust their production to meet peak seasons.
- External events: Unexpected events such as natural disasters, labour strikes, or geopolitical disruptions can disrupt supply chains and extend lead times.
- Communication and coordination: Effective communication and coordination between different departments and partners in the supply chain are key in ensuring that processes flow smoothly and lead times are minimised.
How to shorten lead times
You can take several strategic actions to shorten lead times and improve overall efficiency in delivering products. These can be performed on an ongoing basis to achieve a system of continuous improvement.
Here are some useful techniques for shortening your lead times:
- Effective planning: Thoroughly plan and forecast demand to ensure that production and procurement activities are aligned with expected orders. Accurate planning can prevent last-minute rushes and delays.
- Streamline processes: Review and optimise production processes to eliminate bottlenecks and unnecessary steps. Lean manufacturing principles can help identify and eliminate process inefficiencies.
- Supplier collaboration: Build strong relationships with reliable suppliers. Collaborate closely with them to ensure timely delivery of materials and components, and work together to address any potential disruptions.
- Inventory management: Maintain an appropriate level of inventory to reduce reliance on just-in-time delivery. This can help mitigate delays caused by unexpected supply chain disruptions.
- Technology integration: Implement modern supply chain management tools and software to enhance visibility, tracking, and coordination across different stages of the production process.
- Concurrent processing: Identify tasks that can be executed simultaneously rather than sequentially to accelerate production timelines without compromising quality.
- Cross-training: Train employees to handle multiple tasks or stages of production. This flexibility can help prevent delays caused by specialised personnel being unavailable.
- Automation: Introduce automation where possible, especially for repetitive or time-consuming tasks. Automation can lead to faster and more consistent production.
- Reduced changeover times: Minimise the time it takes to switch between different products or production runs. Efficient changeover procedures can lead to increased production capacity.
- Prioritise orders: Implement a system to prioritise orders based on factors such as customer importance, order size, and delivery deadlines. This helps you allocate resources effectively.
- Feedback loop: Establish a feedback loop with customers to understand their needs and expectations better. This can aid in refining processes and tailoring production timelines accordingly.
- Continuous improvement: Encourage a culture of continuous improvement within the organisation. Regularly review and refine processes to identify opportunities for enhancing efficiency and reducing lead times.
- Supply chain visibility: Increase visibility into the entire supply chain to anticipate potential disruptions and proactively manage them.
- Outsourcing: Consider outsourcing certain tasks or processes to specialised vendors if it leads to faster turnaround times.
- Employee empowerment: Empower employees to make quick decisions when faced with challenges. This can help to avoid delays which can be caused by requiring various permissions and clearances before action can be taken.
By implementing a combination of these strategies, businesses can effectively shorten lead times, improve customer satisfaction, and gain a competitive advantage in the market. However, improvements in lead time rarely happen overnight.
Shortening your lead times is a gradual process that must be repeated whenever demand picks up and the systems you have in place aren’t set up to match it. But by identifying all the steps in your supply chain and understanding where any bottlenecks exist, you can put a plan in place to rectify those issues and reduce lead times in your business.
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