Lead Time Meaning for Manufacturers
Lead Time Meaning
Lead time can mean different things depending on the industry. In manufacturing, lead time refers to the time it takes for a production process to begin and end. Lead time is established by adding the time it takes to procure, manufacture and deliver goods.
Lead time affects manufacturing processes as well as other aspects of production, like supply chain management and project management. By
comparing the actual timelines against established benchmarks, it’s easy to determine if a manufacturing process is efficient or not.
The goal for manufacturers is to reduce lead time as this improves productivity, boosts output, and increases revenue. Shorter lead times are achieved by implementing strategies like automation and lean manufacturing. Longer lead times affect sales and entire manufacturing processes negatively. Common reasons for long lead times include raw material shortages, delays in procuring raw materials, labor shortages, transport delays, human errors, and natural disasters.
What is Manufacturing Lead Time?
As mentioned, manufacturing lead time is the total duration of time taken from the start to an end of a manufacturing process. Manufacturing lead time is dictated by many factors ranging from raw material availability to the complexity of a product, steps involved in production, availability of machinery and labor, as well as the size of an order.
Formula to Calculate Lead Time
How to Calculate Lead Time
Lead time is usually categorized into pre-processing, processing, and post-processing. Each of these categories require time.
Total Lead Time = Pre-Processing/procurement time + Product Processing/manufacturing time + Post-Processing
The pre-processing time represents the procurement stage, where raw materials are acquired and delivered to manufacturing or processing plants. Processing times involve processing orders. This stage involves the actual manufacturing of products. The post-processing stage encompasses all processes from packaging to delivering products to the customer.
Depending on the company in question, the formula may change. For instance, retail companies don’t do product processing. Their lead time formula, therefore, looks something like this;
Total Lead Time = Procurement Time + Shipping Time
Lead time is also calculated conventionally. For instance, the most common way of calculating lead time is by subtracting the order request time from the order shipping time.
Total Lead Time = Order Delivery Time – Order Request Time
When calculating the lead time with respect to inventory management i.e., the time it takes to re-order raw materials, the formula is as follows;
Lead Time = Supply Delay Time + Reordering Delay
11 Ways to Reduce Manufacturing Lead Times
Having understood the lead time meaning and how to calculate lead time, let’s discuss how to reduce lead time in manufacturing;
1. Order in Small Batches
If you make large orders only when it’s time for replenishing products/materials, you are bound to increase the time taken to fulfill such orders. A more agile approach would be breaking up orders to fulfill orders faster and lower the lead time. However, if you are getting a bulk order discount, it may be prudent to order in bulk. As a result, small batches should be the first consideration when lead time is of utmost importance
2. Have Lead-Time Contracts
If you want to have great lead times, it also helps to have binding contracts with your suppliers. The contracts must have clear and stiff penalties for late shipments and other types of delays and related eventualities like damaged shipments. Suppliers who face legal and financial implications for late deliveries will almost always do whatever it takes to deliver goods on time.
3. Utilize Technology
Technology such as inventory management software can help to eliminate lead time issues linked to human error and other inefficiencies of manual processes. Instead of using a spreadsheet to track lead-time, inventory management software will help greatly.
4. Partner with Suppliers
Partnering with suppliers can also have the same (if not a better) impact on lead time. By treating suppliers as part of your team and giving them access to important data i.e., inventory levels, they are in a better position to anticipate your supply needs before you even contact them.
5. Have Safety Stock
Lead time can also be reduced by always having safety stock that is available in case of supplier delays or other eventualities like damage. Safety stock acts as a buffer that enables you to continue fulfilling orders as you wait for a new supplier or the production process to be completed. Manufacturers also need specific guidelines for reordering stock.
6. Consider Domestic Suppliers
Raw materials sourced from overseas are prone to delays ranging from logistical problems to eventualities like products being damaged or lost in the high seas. A domestic supplier solves this problem. Since they are nearby, the delays and risks associated with shipping are eliminated.
7. Work with Sales Forecasts
Long lead time related to supply delays can be caused by lack of sales forecast data. When manufacturers don’t know how much sales they should expect to make at given periods, they can’t plan accordingly to have enough raw materials. Sales forecast data helps to anticipate needs and reduce fulfillment time.
8. Have Standard Components Ready
Manufacturers that make customized products can save time in production and reduce costs by always having standard components ready. Collaborating with suppliers to ensure tweaks in product design are accommodated in standard components is a great way of reducing lead time without compromising on quality of finished products.
9. Consolidating Suppliers
Besides partnering with suppliers, it helps to consolidate many suppliers to ensure you never fail to deliver raw materials when you need them. To have great lead times and gain unmatched competitive advantage, the focus should be beyond managing suppliers. Trying to coordinate suppliers and have them handle many purchase orders at once can delay orders.
It’s good practice to have more than two backup suppliers for a single raw material, even if you won’t always need them. However, it helps to condense the supply chain and deal with the optimal number of suppliers based on past experiences. Most importantly, you’ll need vendor management software to consolidate suppliers and add value.
10. Incentivize the Process
Partnering with suppliers is good. However, you need to offer some incentives to ensure you have the best lead times possible. For instance, you can offer your suppliers bonuses for completing orders ahead of time. It also helps to choose suppliers with expedited plans that allow you to receive products faster than your competition. Most importantly, there’s a need for some sort of incentive for all lead-time stakeholders to do more than they would normally do.
11. Maintain Open Communication Channels
Besides partnering with suppliers and giving them access to your inventory levels, it helps to keep communication channels open to ensure expectations are met, and eventualities are handled promptly. Communication is critical, especially when changes happen that aren’t captured by inventory software.
In summary, manufacturers keen on making a big difference should work on improving lead time as opposed to accepting long lead times as part of doing business. While there may be other ways of reducing lead time, the above information is all that is needed by most manufacturers to make a significant positive difference in lead times.
Why is Lead Time Important for Manufacturers
Are shorter lead times a good thing? Why should manufacturers bother implementing the above tips for shortening lead times? Well, there are many reasons the most notable being;
- Increased customer satisfaction: Manufacturers who can reduce lead times below the industry average are able to satisfy their customers better and enjoy unmatched advantages. If a customer gets their order fulfilled faster than they anticipated or faster than the industry average, this is bound to leave a good impression. Creating repeat clients is easy, as well as getting referrals which boosts profitability.
- Less spoilage: Many goods have expiry dates. Such goods must be sold before expiring otherwise, the goods get spoilt and can’t be sold, which ultimately leads to waste. Short lead times increase the time it takes for customers to buy off all produced goods, resulting in less spoilage.
- Lower labor costs: Shorter lead times create efficiencies in the manufacturing process and may very well reduce the need for labor. Manufacturers must review internal processes to reduce lead time. The process of doing this uncovers inefficiencies and offers critical insights. The result is lower cost and more efficient processes.
- Increased sales: As mentioned, customers love when they get their orders faster than anticipated. Shorter lead times create happy clients who keep buying and recommending others to buy from you. The market is likely to incline to manufacturers who deliver products quickly without compromising on quality.
- Better capitalization: Shorter lead times can also boost capital efficiency. Since the process of shortening lead times uncovers inefficiencies, it’s possible to release cash that is tied up in excess raw materials and labor costs and redirecting that cash to other critical processes. Manufacturers who have more capital can redeploy it to research and development, marketing, product expansion, and other processes that offer a higher return.
