Getting orders out to customers requires manufacturers to understand how long it takes to turn raw materials into finished products. Understanding lead time allows manufacturers to provide accurate delivery times to customers, look for ways to eliminate waste, and automate processes to improve operational efficiency and improve your bottom line. Below, we'll dive further into everything you need to know about lead time, including how to calculate it and the benefits of reducing it.
What Is Lead Time?
Lead time calculates the time between the start of a project and its completion. When applying lead time to manufacturing, you're attempting to calculate the time from when a customer places an order to the moment the order is delivered.
Different management departments use the lead time to see whether there are gaps in performing tasks. Procurement management, project management, operations management, and inventory management are just some areas where lead time may help improve workflow. It may also apply to logistic management tasks to improve how raw materials arrive on the manufacturing floor and how long it takes for finished products to reach customers.
Lead time begins well before the production line makes an order. Some manufacturers calculate lead time when they order materials, and suppliers ship those materials to operations, often called material lead time. Production lead time, meanwhile, encompasses the time frame of making and assembling the order. Other manufacturers, and often retailers and fulfillment centers, begin tracking lead time when a customer places an order, which they refer to as customer lead time.
You may also hear other metrics discussed alongside lead time, such as cycle time and takt time. While these other metrics can affect lead time, understand that cycle time only refers to the time it takes to complete specific tasks to manufacture and deliver a product after the order is processed. Takt time is a lean manufacturing measurement for the rate at which workers or groups of workers produce items to meet customer demand.
While lead time encompasses the entire supply chain from start to finish, we can break down the metric into specific components that each represent an important stage of the manufacturing process. Below, we’ll explore these components in further detail.
Pre-processing time applies to the stage before an order is placed and manufactured. It often involves planning what products you plan to make and understanding what materials are needed to make those items. You create a purchase order for those materials or develop a new product idea that will go through the production process.
Processing time occurs after an order comes in, and the product then undergoes the manufacturing process. Processing time encompasses the time frame that equipment and machine operators perform any active work with the materials.
Within processing the product, there are periods when the item must wait for a workstation to be free before undergoing further processing. This period is called waiting time. Waiting time may involve a worker waiting on materials to reach their station or a piece of equipment sitting idle during production due to overproduction or excess inventory. While some level of waiting is often unavoidable, it’s important to note that long waiting times can lead to longer lead times, so it’s prudent to minimize wait time as much as possible.
The transportation component of lead time refers to the movement of goods from your facility to the customer. It includes all the time taken to arrange transportation logistics, such as reserving a ship (if moving the item over maritime waters) or making arrangements with a trucking company to reserve trucks and drivers for product delivery.
Sometimes manufacturers don't send out orders to customers immediately. Instead, the items go into storage. Storage time represents the time that inventory sits on shelves before it’s picked and packed for orders. The products may wait in the manufacturing facility or sit at the warehouse.
Inspection time involves evaluating products to look for damage or possible defects. When inspection time occurs may vary: You may incorporate inspection time within production time processes or make inspection time a separate stage after the item's completion.
The lead time calculation can vary depending on who performs the measurements and at what stage you want to perform the calculation. For manufacturers, the general formula is:
Lead time = Material order time + Production time + Customer lead time
You may also see lead time calculated as:
Lead time = Pre-processing time + Processing time + Post-processing time
Companies may calculate lead times for specific processes, such as inventory. Retailers and fulfillment centers may also use the equation to measure the lead time for operations, which may include specific components such as storage time, customer lead time, and transportation time.
Imagine that a custom wheelchair manufacturer wants to determine their operational lead time. They want to figure out how to reduce their lead time to get their wheelchairs to customers in less time. The manufacturer has the advantage of being close to their suppliers, so it may take only three days to receive the materials. Since the manufacturer customizes the wheelchairs to each customer's specifications, it may take two weeks to produce a wheelchair. Once the wheelchair is made, it takes a week (seven days) to deliver the wheelchair to the customer.
Once plugged into the lead time formula, the calculation would look like this:
Lead time = 3 days (material order time) + 14 days (production time) + 7 days (customer lead time)
So in this example, the lead time is 24 days.
Now that you understand manufacturing lead time, you can pivot your focus to find ways to reduce it. Reducing lead time may help to tackle inefficiencies and manufacturing waste which can greatly improve your bottom line. There are several methods for reducing lead time based on where you find gaps in your operations, but let's discuss four of the most straightforward ways that your organization can implement now.
Large batch orders take up the most time for operations, as it takes more time to deliver raw materials, produce products, store inventory, and ship large orders out. Reducing order sizes may lead to faster processing, as it takes a shorter amount of time to get raw materials to you and, thus, to make goods. To make up for the reduction in order size, you may decide to order supplies more frequently.
A supplier lead time contract outlines delivery timeframes that complement your existing supply chain. The supplier has a specific time by which their raw materials must reach your factory floor. These supplier contracts mainly focus on establishing a fair lead time for raw material supplies and levying penalties on the supplier if they don't meet the contract terms due to delivery delays. They may also include other aspects such as damage liability, prior price change notice, and prior notice of shortages. Manufacturers ensure a smoother procurement process with fewer delays and bottlenecks with lead time contracts.
Manual inventory tasks take up valuable order processing time. Workers must do everything manually: from inputting product codes into systems to gathering order forms to taking stock off shelves for orders. Not only is this time-consuming, but these tasks also increase the chance of human errors, which leads to inaccurate inventory levels — and waste. Automating these tasks using inventory management technology helps speed up inventory tasks, minimize inventory errors, and reduce waste.
Having a strong relationship with suppliers offers benefits to both parties. Suppliers understand more about your operations regarding taking sales orders and stocking inventory. They may consider these factors and customize how they process and deliver orders to you, leading to shorter lead times. In return, you may wish to offer incentives to suppliers who adhere to their lead time contracts and actively reduce the number of damaged goods delivered.
Reducing the amount of time in which you receive materials, produce items, fill orders, and ship products provides the opportunity to make your entire operations more efficient. You may also increase customer satisfaction by providing products more quickly. Here are some additional benefits you may enjoy as a result of a reduced lead time:
Reducing lead times may allow you to hold less inventory as products move from production to the customers' hands faster. You can better manage inventory levels to lower waste and warehouse overhead costs.
Reducing lead time means that you are prepared to handle any fluctuations in market conditions or customer demand. If customers are no longer interested in a product, manufacturers can smoothly shift to other production lines and effectively reduce inventory levels without creating additional waste.
In the ecommerce industry, shorter lead times allow you to gain a competitive edge when pleasing customers. You may offer faster processing and delivery times than your competitors, leading customers to shop with your ecommerce store more frequently. This benefit leads to higher profits and the development of a loyal customer base.
Understanding your processes and how long it takes to make and deliver orders is valuable information that you can use to streamline operations. By calculating lead time, you can more easily spot potential issues preventing you from meeting output goals — and address them. Once you understand your manufacturing lead time, you can focus on finding ways to reduce it, including automating processes with newer technologies and forming stronger relationships with suppliers.
At Amper, we offer tools to track real time production data, so you can act fast before your lead times are affected. Set up a demo or learn about our free trial.
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