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You may have heard the term lead time often. Have wondered what it and is how it affects your business? This article throws light on what lead time is, how to calculate lead time and ways to improve lead time.
What is the lead time?
In supply chain management, lead time is the total time it takes from the order placement to the delivery of goods. It can further be broken down into multiple elements of supply chains, such as production lead time, delivery lead time, etc. For example, the time the factory gets all necessary raw materials to start production till the time the company finishes the production process is known as production lead time. Customer lead time is when the customer places an order till the customer receives the order.
In other words, lead time involves the entire supply chain including production and inbound and outbound logistics.
- For any e-Commerce company, customer lead time is crucial for achieving customer satisfaction. Shorter the lead time, the better the customer satisfaction.
- On the other hand, in the B2B business scenarios, production may start after the order is received. Therefore, the lead time is longer.
Various factors impact lead time. For example, proximity to customers. Lead time to local customers will be lesser than far away customers.
Why is it important to calculate the lead time?
It is essential to calculate the lead time because it is key to customer satisfaction. Customers are happy to receive orders as soon as possible. Therefore, if you are able to beat your competitors in the race, you will be able to receive more orders and grow your business.
Here are some of the benefits of a shorter lead time:
- Lesser chances of overstocking and hence avoiding losses
- Less money gets stuck in inventory and hence inventory management can be done efficiently
- Improves inventory turnaround ratio as your inventory is turned around quickly
- Improves profits
How to calculate lead time?
Here is a formula to calculate.
Leading time = production time + procurement time + shipping time
Explaining it with an example:
If you are a coffee mugs maker, and you receive an order of 500 mugs. Here is how the calculation goes:
The estimated time for you to procure all necessary raw materials is about 4 days.
The estimated time of production is about 3 days.
The estimated shipping time is 4 days.
Lead time = 3 days + 4 days + 4 days
Lead time = 11 days.
Lead time vs cycle time
Lead time can easily be confused with cycle time. However, they are two different terms. Here are the key differences between the two:
|Lead time||Cycle time|
|Definition||Calculates the overall time taken from the order placement till delivery to the customer.||It is time taken from the raw material to get into production till the finished product comes out.|
|Overview||It gives an overview of overall production and logistics operations.||It gives an overview of the production process.|
|Visibility||It gives visibility to customers to the delivery of the goods.||It is an internal parameter and gives visibility on internal production processes.|
How to improve?
Do you want to improve the lead time of your business? Here are some tips that may help you to improve it.
- Calculate your lead time: Firstly, calculate your lead time and determine if it needs any improvement. There is no ideal lead time. Ideal lead time may depend on various factors such as your production cycle time, proximity to customers, and so on. For example, the lead time to deliver goods to international customers will be higher than the local customers. In this case, freight forwarders play a key role.
- Timely reordering is important: Having a raw material sourcing strategy is important. Reorder your raw material timely, so that your production does not come to a halt.
- Improve relationships with suppliers: In order to fasten the procurement process of raw materials, you need to relook at partnership terms with your suppliers. Make sure your partners deliver raw materials in the specified time.
- Choose local suppliers: Using local suppliers can improve lead time for your business as raw materials can be reached at your doorstep faster.
- Have a trusted logistics partner: You need to have a trusted logistics partner. Whether you prefer a sophisticated 3PL logistics partner or just trucking services, your logistics partner should be able to deliver goods on time without any delays. You can improve your lead time by availing of innovative logistics services such as part truck loading. Tata nexarc has partnered with multiple logistics providers to offer part truck load services. It is an affordable way for hassle-free cargo movement for your business. Book your shipment now.
To sum up, a business needs to calculate lead time and take necessary actions to check the areas of improvement. Having a shorter lead time is advantageous. It helps you to turn around inventory faster. As a result, of optimum stock being in the inventory, you will be able to quickly adapt to the dynamic market conditions.