The Importance of Lead Times in Manufacturing

For many of us ‘lead time’ sounds a lot like ‘delivery date’. Unfortunately there’s a lot more that goes into the makeup of a part or material’s lead time than that. Inventory lead time includes various stages such as order processing, production, procurement of materials, transportation, and receiving – and each needs to be understood and monitored. We go into detail on this and how lead times affect how companies plan for purchasing and production operations. 

What makes up lead time

Inventory lead time refers to the time it takes for a product or component to be replenished once an order is placed. It encompasses the entire process from the moment an order is initiated until the inventory is physically available for use or sale. This elapsed period contains several steps. Each of these has an effect on the total time and needs to be tracked regardless of whether they are specifically called out in the purchase agreement or not.

Order Processing Time

This is the time it takes for an order to be received, reviewed, and entered into the systems of the buyer and vendor. It includes any administrative tasks such as order confirmation, verification, and communication with suppliers. For some orders, this can be instantaneous. For others the processing time can stretch from days to weeks or longer, depending on what’s being purchased, from where, and the intricacies of the process itself.

Production or Procurement Time

Once an order is processed, the actual production or procurement of the product or component begins. This involves manufacturing processes for internally produced items or sourcing activities for externally procured items. The time required for production or procurement depends on factors such as manufacturing capacity, supplier lead times, and production schedules. These times may flex according to the inputs that make up the supply chain or internal operations.

Transportation Time

After production or procurement is completed, the inventory needs to be transported from the manufacturing facility or supplier’s location to the buyer’s location. Transportation time includes transit time via various modes of transportation such as truck, rail, air, or sea, as well as any customs clearance or border delays for international shipments.

Receiving and Inspection Time

Upon arrival at the buyer’s location, the inventory undergoes receiving and inspection procedures to ensure it meets quality standards and specifications. This includes unloading, unpacking, verifying quantities, inspecting for damages or defects, and recording inventory receipts in the system.

Internal Processing Time

In some cases, additional internal processing may be required before the inventory is available for use or sale. This could involve tasks such as labeling, sorting, assembly, or quality control checks before the inventory is stocked in the warehouse or made available for production.

As can be seen, there’s a lot of potential variance in what it takes to complete an order. Some of these aspects may be included in the published lead time and others may not. It is up to the organization to fully understand the complete process and the times elapsed for each stage. By understanding and accurately estimating the underlying times for fulfillment of orders, businesses can optimize inventory levels, minimize stockouts, reduce carrying costs, and improve overall operational efficiency.

How does lead time factor into purchasing decisions

Lead times should play a significant role in a buyer’s decision-making process, particularly in the electronics industries where products are manufactured, sourced from suppliers, or some combination of both. Lead times also need to align with the organization’s inventory management strategies and capital management requirements. Buyers must juggle each of the aspects below to find the best compromise in metrics for their inventory strategy. 

1. Time Sensitivity

Buyers often have specific timelines or deadlines for when they need products or components. Lead times directly impact whether a supplier can meet these deadlines. If lead times are too long and cannot align with the buyer’s schedule, the buyer may opt for a different supplier or product that can deliver within their required timeframe.

2. Inventory Management

Buyers consider lead times when managing their inventory levels. Longer lead times may require buyers to maintain higher inventory levels to ensure they have sufficient stock to meet demand during production or sales cycles. Conversely, shorter lead times allow for leaner inventory management practices, reducing carrying costs and the risk of excess inventory.

3. Production Planning

For buyers involved in manufacturing or production, lead times are critical for production planning and scheduling. Longer lead times may necessitate forecasting demand further in advance and coordinating production schedules accordingly. Delays in receiving components or materials due to longer lead times can disrupt production schedules and impact overall efficiency.

4. Risk Management

Buyers assess the risks associated with longer lead times, such as supply chain disruptions, transportation delays, or production bottlenecks. Longer lead times introduce greater uncertainty and vulnerability to these risks, prompting buyers to weigh the potential consequences and consider alternatives to mitigate risks.

5. Supplier Dependability

Buyers evaluate suppliers based on their ability to meet lead time requirements consistently and reliably. Suppliers with longer lead times and a track record of on-time delivery may be preferred over competitors with shorter lead times, even if other factors such as price or quality are comparable.

6. Cost Considerations

Lead times can influence costs associated with procurement, inventory holding, and expedited shipping or production. Longer lead times may result in higher inventory carrying costs, while negotiating for shorter lead times may incur additional expenses for rush orders or expedited shipping to meet urgent requirements. Buyers weigh these cost considerations when evaluating the overall value proposition offered by suppliers.

7. Competitive Advantage

Shorter lead times can confer a competitive advantage for buyers, enabling faster time-to-market, responsiveness to changing customer demands, and greater flexibility in adapting to market dynamics. Buyers recognize the strategic importance of lead time management in maintaining competitiveness and meeting customer expectations.

There’s many factors that go into selecting where to purchase parts and materials from. Lead times and its effects can play an outsized role in the process. They can influence inventory management, production planning, risk assessment, supplier selection, cost considerations, and competitive positioning. Buyers need to weigh all these aspects against what the company needs to make good inventory management decisions.

How is lead time managed

Once the right amount of attention is given to lead times, the need to better understand, manage, and monitor the details increases in importance. Effective lead time management is a component that can have outsized effects on meeting customer expectations, minimize inventory costs, and maintain competitiveness in the market. Here is what needs to be done to manage lead times properly. 

1. Thorough Measurement and Analysis

The first step in lead time management is to measure and analyze lead times for various stages of the production and delivery process. This includes identifying the actual time taken for order processing, production, procurement of materials, transportation, and any other relevant activities.

2. Effective Forecasting and Planning

Accurate estimation of demand and production requirements is foundational for managing lead times effectively. By anticipating future demand and building production schedules accordingly, businesses can minimize the risk of stockouts or excessive inventory levels by selecting vendors who fit with their timeline needs.

3. Increasing Supplier Collaboration

Working closely with vendors is essential for managing lead times, especially for businesses that rely on external suppliers for components or materials. Establishing trustworthy and reliable relationships with suppliers, sharing forecasts, and maintaining open communication can help ensure timely delivery of materials while minimizing disruptions in the supply chain.

4. Streamlining Processes

Smoothing production processes and eliminating inefficiencies can help reduce lead times significantly – both with vendors and internally. This may involve implementing lean manufacturing principles, investing in automation technologies, or redesigning workflows to minimize unnecessary delays or bottlenecks. It may also include migrating to software designed to manage inventory and purchasing operations like Aligni MRP.

5. Optimizing Inventory Levels

Businesses need to strike a balance between maintaining adequate stock to meet customer demand and minimizing excess inventory carrying costs. Just-in-time (JIT) inventory practices and demand-driven replenishment strategies can help achieve this balance, but both can only be had when a firm handle on delivery and order times is achieved.

6. Investing in Information Management Tools

This includes using Material Requirements Planning (MRP) systems, Supply Chain Management (SCM) software, and advanced analytics tools to monitor inventory levels, track order and delivery metrics, monitor production schedules, and identify opportunities for improvement.

7. Practice Continuous Improvement Activities

Lead time management is an ongoing process that requires continuous monitoring and improvement. Businesses should regularly review their processes, analyze performance metrics, and identify areas for optimization to enhance efficiency and reduce lead times further.

Managing lead times with the right tools

Once the intricacies of lead time management is understood, having the right tools to handle the data and information required becomes almost a necessity. Many small and medium sized businesses tend to manage this information in dedicated MRP systems. 

For instance, Aligni MRP handles both the details involved in managing inventory for production as well as everything that goes into the purchasing process. This combined approach means less digging through files, emails, and calling meetings to operate an effective strategy to manage inventory needs. Aligni’s MSR interface even puts lead times front and center when managers are assessing readiness of upcoming production activities. 

Bringing it all together

After touching on the intricacies of what goes into lead times and the investment needed to manage supplier and inventory, most understand there’s a lot to keep track of. Even with something as simple-sounding as lead times, there are several places where companies can get caught on the back foot. It’s easy to see why highly effective and efficient organizations turn to dedicated software to manage all the details and make it available for better decision making. 

If you’re looking to have more fine-grained control over your buying and delivery processes, it’s time to step up to the right system to manage the details, Aligni MRP.