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Lead Time: What It Is and Why It Matters

Discover how your product's lead time can affect your profits, operations, and customer satisfaction.

One of the most important factors in business success is how quickly a company can design, plan, manufacture, and deliver a product. The business landscape changes quickly, and the more agile and responsive a business can be, the better the chance for success.

Lead time is one of the most useful ways to understand and improve business operations and customer service. This article explores what lead time is, what factors affect lead time, how to calculate lead time, and some tips for shortening your lead time for maximum efficiency and customer satisfaction.

What is lead time?

Lead time is the duration between starting a process and completing that process. There are many different kinds of lead times in business, including material lead time, actual order lead time, and cumulative lead time. Which type you should focus on depends on the nature of your business and which part of your process you want to evaluate.

Lead time is related to cycle time, another metric to measure efficiency. Cycle time is a component of lead time and includes only the time when work is actually being done to complete an order. It doesn’t include other important lead time components like storage time and production delays.

Why a short lead time is important

Making sure that your business has the shortest possible lead time is crucial for efficient operations and customer satisfaction. Reducing the amount of time it takes to perform key parts of your process, like the time between order placement and product delivery, has many benefits.

Customer satisfaction

Shorter lead times help meet customer expectations for quick service, minimal waiting time, and fast delivery. Being able to fulfill orders and deliver products by the expected date helps build your company's reputation for quick, quality service and helps foster customer loyalty and satisfaction.

Competitive advantage

You know that your customers have a lot of options. Making sure your lead time is as short as possible gives your business an advantage over your competition. It can mean a faster order processing time or a speedier manufacturing process.

A shorter lead time also allows your company to be more flexible and responsive to customer needs, changing trends, and market conditions. This agility is good for you, your customers, and your competitive edge in a market where even a day or two can make a difference.

Increased flexibility and responsiveness

With a shorter lead time, your business can adapt to unexpected delays. The ability to make adjustments to your orders' pre-processing time, supply chain management, or other factors means that you can respond quickly when issues like shipping disruptions or equipment failures arise. In addition, it increases your ability to make quick decisions and stay competitive.

Better cash flow management

Shorter lead times can also reduce your costs. For example, you won't need to keep as much inventory on hand to meet immediate customer demand, thus minimizing the amount of funds you'll need to tie up in storage costs.

Shorter lead times can also reduce your costs. For example, you won’t need to keep as much inventory on hand to meet immediate customer demand, thus minimizing the amount of funds you’ll need to tie up in storage costs.

In addition, a more efficient process means that a business can convert resources like raw materials into finished products and therefore increase revenue more quickly. This enhances your business’s financial efficiency. Shorter lead times also have a significant impact on project management and financial planning since companies can allocate resources based on real-time demand. This makes a more predictable and efficient cash flow structure.

Improved efficiency

Calculating lead times for any part of your process allows you to see opportunities for improved efficiency. For example, if your supply chain lead time is slower than expected, focusing on that part of the process can help. In addition, it can be useful to define a maximum lead time for any part of the process for which you're trying to improve efficiency, giving you a target to reach for and a way to measure progress.

Common types of lead times

There are as many kinds of lead times as there are components to your sales, production or fulfillment processes. The following are a few of the more common types.

Production lead time

Production lead time refers to the time it takes to complete the production of a product, from the point when all the materials are on hand through the finished product itself. This is also referred to as manufacturing lead time.

Production lead time has an effect on many other parts of running a business, including inventory management and operational planning. Shortening the production and manufacturing process timeline can allow your business to fulfill orders more efficiently and respond more quickly to market demands.

Customer lead time

Customer lead time is the duration between when a customer places an order and when they receive the product or service, including shipping and delivery. Paying attention to your business's customer lead time is a good way to make sure you're meeting customer expectations and providing the best service possible.

There are a number of factors that affect customer lead time, including order processing time, production schedules, and supply chain issues. In addition, communication can play a key role in both helping manage internal lead time delays as well as customer expectations.

Order lead time

Order lead time is related to customer lead time, but includes only the period of time from when an order is placed to when it is fulfilled by the seller, not including shipping and delivery, which is often done by a third-party service. While customer lead time is partially out of your control, order lead time is an area where businesses can evaluate their performance and shorten lead times in a number of ways.

Two important types of order lead times are requested order lead time (ROLT), the time in which the customer requests to receive the order, and confirmed order lead time (COLT), the time between when a supplier confirms an order and the order delivery date. If COLT exceeds ROLT, you may not be meeting customer expectations, and this is a good chance to institute more efficient processes.

Other types of lead times

The types of lead times that are relevant to you will vary depending on the nature of your business. Following are some more you may want to consider as a way to maximize your business operations and customer service.

Engineering lead time

Engineering lead time is the amount of time it takes to complete a product's design, development, and manufacturing. It includes everything from the product's initial concept through the final production stages. Businesses that create and manufacture their own products should be aware of their engineering lead time, since it can affect their ability to deliver products, stock inventory, and fulfill orders in a timely manner.

Procurement lead time

Procurement lead time is the time it takes to acquire your necessary goods or services. It includes every part of the procurement process, including choosing vendors, negotiation, order placement, and delivery. While procurement itself is only one part of the production process, it’s an important type of lead time to keep in mind. Some parts of it may be out of your control because it relies on outside vendors, but it's important that you make sure you have good communication and work with vendors who are focused on optimizing lead times within their own organizations.

How to calculate lead time

Calculating lead time can help track the efficiency of your business's processes and aid your project management. To use the lead time formula, first determine which type of lead time you're interested in. Then simply add up the time spent at each stage of the process. You can either get an overall lead time by looking at the start and end date of the process, or by adding up the time for each stage.

Comparing average lead times from different time periods can help you identify opportunities for improvement or determine whether there might be things that have slowed down your processes.

Factors that affect lead time

While there are many things that can affect lead times, the following are some common factors that you should keep in mind when looking at all the components of lead time and finding issues that might lead to delays.

Natural events

Weather events and natural disasters like floods, earthquakes, or hurricanes can have major effects on all types of lead time. These events affect supply chains and infrastructure, increasing manufacturing time and resulting in transportation delays.

While it can be impossible to predict when a natural event will occur, you should assume that your business will have to deal with this type of disruption from time to time and plan accordingly.

You can prepare alternative supply chains, diversify the manufacturers you work with, and make sure your inventory and logistics systems are up to the task of handling unpredictable events. Planning ahead and thinking through possible scenarios will help put plans in place to reduce lead times in the event of natural disasters.

Human error

Even if a large part of your procurement, manufacturing, and sales process is automated, there are still humans involved along the way. Human error is inevitable and can contribute to lead time delays in a number of ways, including miscommunication and procedural and record-keeping mistakes.

In addition, employees who are poorly trained or lack necessary skills can have a significant effect on lead time management. It’s also possible for employees to feel overworked or a workplace to be understaffed for a particular task, both resulting in delays. Making sure to address deficiencies in your process and in the way that your employees are trained and managed can help reduce lead time and improve customer satisfaction.

Supply chain complexity

Supply chains involve multiple elements like suppliers, locations, and processes. A delay anywhere in the system can slow everything down. Delays can result from transportation issues, inventory management problems, and challenges coordinating everything. The more you can do to simplify your supply chain through improved communication and process transparency can help reduce your supply chain's effect on lead times.

Order size and frequency

Lead time can also be influenced by the size and frequency of orders. It makes sense that large orders may cause longer lead times if the larger volume requires more resources or raw materials, leading to a supply delay. In addition, the manufacturing lead time may suffer if the manufacturing capacity is strained. It's often cheaper to produce larger orders, but taking advantage of this economy of scale can also mean delays in certain elements of your process or your cumulative lead time.

Similarly, order frequency can affect lead times. Placing orders more often or breaking up large orders into smaller batches means that most parts of the process can be more responsive, shortening delays. However, a large number of smaller orders can be less efficient and require more logistical management.

Working to find the right balance of order size and frequency for your business can take some trial and error, but the effort is worth it to minimize lead times.

Transportation and logistics

Unless your business operates entirely virtually, transportation and logistics will play a part in determining your lead time and delivering a finished product to your customers. This part of the process is subject to numerous unexpected disruptions. In addition, poor planning and inventory management can keep your transportation time—and therefore your total lead time—higher than it needs to be. International shipments face the additional challenges of overseas shipping and customs procedures, including proper documentation processing time and fees.

Seasonal demand

Many businesses experience peak seasons like holidays, back-to-school, or the summer travel season. This can increase the demand for products at certain times of the year and make production, shipping time, and order fulfillment more difficult, leading to longer-than-average lead time.

Planning ahead for these seasons can help avoid lead time delays. Maintaining flexibility and building higher demand into your project management strategy can help shorten both your overall lead time as well as various components of lead time.

Similarly, knowing when your business typically has a slower season can help you adjust manufacturing plans and inventory management so you don't have extra inventory and the additional costs associated with it.

Five ways to shorten lead time

The good news is that even if you identify delays in your manufacturing process, inspection time, or other elements of your overall lead time, there are ways to improve the process. Below are 5 steps you can take to improve any type of lead time, contributing to cost savings and business growth.

Step #1: Streamline processes

Any opportunity you find to make processes more efficient will contribute to maximum lead time efficiency. Take a look at all parts of the process—from initial purchase order through delivery date. How well does the actual lead time match the order request date? If there are delays, identify where they're happening and why. Think creatively about where bottlenecks might be occurring and how they can be handled.

For example, is there any waiting time that can be eliminated? Are supply delays a problem? Have you allowed enough planning time to make sure things aren't being done at the last minute, leading to costly and frustrating delays when errors are made?

Step #2: Improve inventory management

Another useful idea is to focus on inventory management lead time. Consider using the just-in-time principle (in which inventory is kept to a minimum and products are produced on demand). In addition, consider investing in a computerized system that speeds up the inventory management process and eliminates human errors that can occur with manual recordkeeping.

Step #3: Nurture supplier relationships

For almost any type of business, suppliers are an important part of your entire lead time. Building and maintaining good relationships with suppliers can help you maintain scheduling flexibility and reduce the lead time that causes supply delay problems.

Making sure you maintain good communication and collaboration with suppliers also means that you can keep them up to date about your business’s needs and priorities. In addition, your suppliers can be a valuable resource for insight into lead time factors that may affect efficiency. They can also give you an early heads-up when delays are a possibility.

Step #4: Use demand forecasting

One of the major factors causing lead time delays is uncertainty about demand. No business wants to have too much inventory and pay for more storage than needed. On the other hand, being caught short can lead to delays or drive customers to rely on backup suppliers.

However, demand forecasting—the process of predicting future demand for a product or service—is one way to get a more accurate estimate. Examining past data like market research and trends, sales data, and customer orders is a good start. It can also be helpful to use forecasting software and tools to help you get a handle on all the relevant information.

Don't forget to keep your forecasting information current and update it as factors change to help calculate lead time accurately.

Step #5: Seek input from employees

Even with the best planning, forecasting, and optimization tools, don't forget that your employees can also be one of your best resources.

Seek their input on improving your business's lead times in areas like acquiring raw materials, addressing a supply delay, or ensuring a customer's order is delivered on time. After all, they're the ones working with vendors, supplies, and customers every day.

By fostering a culture of open communication, you can make sure that any ideas or insights your employees have are welcome. Consider offering incentives for proposed solutions that improve lead times and deliver customer orders more quickly. Don't forget to give credit to employees who help streamline processes.

In addition, make sure the communication goes both ways. Keep employees informed about issues your company is having with lead times, project management steps you're taking to address them, and the reasons for any changes you're asking them to make. Showing that you value the input of everyone in the process will encourage more innovative and growth-focused solutions to help meet customer demand.

Lead time can be a complex topic and there are numerous factors that cause lead time delays. However, learning what lead time is and how to calculate accurate lead times will help you deliver each customer order as quickly and efficiently as possible.

Whether your business is a manufacturing company, one that deals with raw materials, or one focused on selling a finished product, understanding lead time and working to improve your average lead time will have benefits for both you and your customers.

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