Lead Time: Types, Causes, and How to Optimize It
Let Circuit for Teams optimize your delivery lead times and redefine your business pace and efficiency.
Have you ever wondered how the tiniest, most unassuming delay in your production or delivery process could snowball into a larger business issue? You’ve probably crossed paths with the number one time bandit in business: lead time.
Whether you’re a manufacturer, a retailer, or a service provider, timing is just as important as the quality of your product or service. Understanding the concept of lead time and how you can control it will make sure your operations run like clockwork.
If you want to understand all the different angles of lead time, you’re in the right place. This post will explore the types of lead time, talk about the factors that could be stretching it out, and guide you on how to optimize it.
I’ll start by defining lead time and then move on to discussing key issues that might be slowing down your lead time and how to fix them. Then, I’ll show you how to calculate lead time and how to shorten it for the best results in your business!
Key takeaways
- Lead time is a metric that measures the period of time from the start to the completion of a production process.
- The lead time formula for manufacturers is: Total lead time = Manufacturing time + Procurement time + Shipping time. For retailers, it’s: Total lead time = Procurement time + Shipping time.
- Long lead times can be caused by procurement and inventory mismanagement, production workflow issues, and inaccurate demand forecasting.
- You can address lead time issues by using safety stock, pinpointing and resolving production bottlenecks, and analyzing historical sales data to improve forecasting.
- Other ways to reduce lead times include streamlining your operations, optimizing your supply chain, minimizing changeovers and setup times, and improving communication and collaboration within your business.
- Keep customers satisfied by setting realistic delivery dates. This will help you manage customer expectations so they understand how long their orders will take to arrive.
What is lead time?
When we’re talking about supply chain management, the term “lead time” has a lot to do with timing, as you might expect. But what exactly is lead time?
It refers to the amount of time between starting a process and wrapping it up. It’s an important metric used in both manufacturing and project management, which can be broken down into different types of lead time depending on the area of business or production.
Imagine a situation where an eCommerce store places an order with their supplier for a popular product. The lead time on that order would be the stretch of time between the moment the order is placed and when it's delivered and ready for resale.
This would take into account all the steps within this process, such as order preparation, shipment, delivery to the stores, and stocking the items. But why is lead time a factor you should be concerned about, and why is a long lead time a bad thing?
Understanding your lead time and how to optimize it has a direct impact on your business efficiency. For example, if an ecommerce store's supplier has a long lead time, the ecommerce store may run out of the popular item before they are resupplied, which means potential missed sales and unhappy customers.
On the other hand, if you order too many items to compensate for a slow supplier, you’ll be stuck with a mountain of unsold stock. That’s why working towards an optimized lead time is a big part of a well-run business.
A too-long lead time, and you’re setting yourself up for risk. When your lead time is just right, you’ll be rewarded with happy customers and a healthy bottom line!
Lead time types
Lead time is broken down into various types, each with its own effects on business performance. Figuring out each one is key to optimizing processes, reducing waste, and achieving a strong operation.
Let’s take a good look at the most common types you might want to examine:
- Customer lead time: The waiting period between when a customer places an order to when they receive it plus any other customer activities like order customization.
If someone orders from an online shoe retailer, for example, customer lead time would start when they begin customizing the look of the shoes they want by choosing sizes, colors, and other details to when the shoes are delivered to them. - Material lead time: Part of material handling, this lead time is all about your raw materials.
Let’s say a car company orders steel to manufacture their vehicles. The time it takes from placing the order for steel to having it delivered to the factory is considered the material lead time. - Production lead time: While material lead time focuses on what’s going on before production begins, production lead time focuses on when production begins to shipping time — when the final product is ready to go. When a baker receives flour, sugar, and other ingredients at the bakery, the time taken to convert those raw ingredients into a batch of baked goods is their production lead time.
- Cumulative lead time: Cumulative lead time is basically the total time it takes for a product to go from "I want it" to "I got it." It includes everything from ordering, manufacturing, getting it shipped, and all of the steps in between.
- Manufacturing lead time: This part of managing manufacturing inventory combines material lead time, production time, and the time it takes to move a product through the production line.
An example would be the time between when a furniture store decides to produce a new collection of furniture pieces until the final pieces are ready for the store that will sell them. - Delivery lead time: The time it takes for a product or service to be delivered from the time an order is placed to the time it is received by the customer. This is similar to customer lead time but without any customer activities besides placing the order.
How to calculate lead time
To precisely pin down your lead times, here are two formulas to help you with calculating lead time.
Why are there two formulas? They vary slightly for manufacturers and retailers.
For manufacturers: Total lead time = Manufacturing time + Procurement time + Shipping time
For retailers: Total lead time = Procurement time + Shipping time
Now, let’s put this into context with examples of lead time for both types of businesses.
Manufacturer’s example: If you run a toy manufacturing company, for instance, your total manufacturing time (the time it takes to transform raw materials into a toy) is seven days. The procurement time (the time taken to gather all raw materials and components) is five days, and the shipping time to stores or customers is three days.
Using the manufacturer lead time formula, the math would look like this:
Total lead time = Manufacturing time (7 days) + Procurement time (5 days) + Shipping time (3 days)
In this case, the lead time is 15 days.
Retailer’s example: Say you’re a retailer that wants to order from the toy manufacturing company we mentioned above. Your procurement time (the time it takes to order and receive the shipment of toys) might be 10 days.
Meanwhile, the shipping time to get the toy to your customer could be two days. Let’s plug these numbers into the retailer lead time formula:
Total lead time = Procurement time (10 days) + Shipping time (2 days)
The lead time is 12 days.
What’s slowing down your lead time, and how to fix it
Maybe you’ve put our formula into action and found that your lead time is longer than you thought. Several factors could affect lead time, but once you identify them, you can work out strategies to get past them.
The perfect lead time is a combination of fine-tuned procurement procedures, strong inventory management, and maintaining just the right inventory levels to avoid stockouts.
Here, we’ll take a peek at reasons for a slow lead time and how you can speed things up.
Procurement and inventory mismanagement
If you’re constantly chasing down raw materials at the last minute, your lead time is bound to suffer. Making sure your inventory management operates like a well-oiled machine is the secret to trimming down those lead times.
In the case of procurement, when you order your materials is just as important as what you’re ordering. Being timely requires you to hit a sweet spot.
Ordering too late could lead to stockouts, while ordering too early might lead to bloated inventory levels that take up valuable storage space and waste money. To keep your inventory management process running smoothly, align your inventory levels with the rhythm of your business.
You could consider implementing a safety stock strategy, which means maintaining enough extra stock to handle any upticks in demand or delays in delivery.
Having a functional reordering system can also help because it alerts you when certain inventory levels are dipping low so you can reorder on time.
Even better, you could use inventory management software to help you monitor and control your stock levels. It can automate tasks like reordering items when they go below a specific threshold and give you a better overview of what’s going on.
Production workflow issues
The way tasks and operations flow in your production line hugely impacts your lead time. A small hiccup can dramatically increase your cycle time and, as a result, skyrocket your lead times.
Among all these potential hiccups are bottlenecks: stages in your production process that can’t handle the load that is given to them. These bumps in the road can cause backlogs and trigger a domino effect.
To optimize your workflow, analyze each step of the production process from when raw materials make their way into your facility to the point where you have a finished product.
Figure out whether there are any steps causing a bottleneck: Are there steps in the process that are overly time-consuming? Are there points where work-in-progress items linger too long before becoming finished goods?
Once you identify these problem areas, the next step is to figure out how to fix them and streamline the production process.
Automation might be the answer. This can lessen human error and reduce time spent on unnecessary tasks.
Another method to consider is using lean manufacturing practices, which involves pinpointing and getting rid of unproductive production processes. One example of lean manufacturing is implementing just-in-time (JIT) inventory management in which materials and components are delivered exactly when needed to minimize your inventory holding costs and reduce waste.
Of course, you can’t forget about the continuous training and skill development of your team. When they’re equipped with the latest industry best practices and operational techniques, you’re bound to see an increase in productivity.
Demand forecasting problems
In any realm of business, forecasting customer demand is something you need to get right — and this applies to good lead time management as well.
For example, overestimating demand can increase holding costs and wasted resources since you’re likely to order too much product. That’s why accurate demand management is a must.
This involves going through your historical sales data and looking for patterns, trends, and seasonality overlaps. Using that data, you can make informed predictions about future demands.
But analyzing past data isn’t enough on its own. You’ll need to refine this data along with external factors like consumer behavior, market trends, competitors, and global events.
Good news: You don’t need to be a data analyst to do this right. Demand planning software can help with its machine learning and predictive analytics tools.
Poor communication
Another thing that can slow down your lead time is poor communication and collaboration between different departments, or between you and your suppliers.
Say you run an eCommerce company, and your marketing team launches a new promotion without informing the operations team. The operations team can be caught off guard by the sudden spike in orders, leading to delays in processing and shipping, ultimately slowing down your lead time and frustrating customers.
Good communication and collaboration between teams could have prevented this issue, allowing for a smooth flow of information and a faster response to changes in demand.
Fostering a culture of open communication and encouraging employees to share ideas and concerns can lead to better, faster problem-solving and decision-making, and thus, shorter lead times.
5 ways to shorten your lead time
We’ve already uncovered some potential roadblocks along the way from forecasting failures to procurement problems and discussed ways to fix them. Now it’s time to check out some practical and actionable ways to shrink your lead time.
1. Streamline operations
One way to streamline your business processes is to examine your pre-processing time (such as the time spent gathering resources and setting up equipment before a specific task or process can begin) and post-processing time (the time spent on activities done after a task or process is finished, like quality control checks, packaging, or documentation).
When you look closer at every step of your operations, you’ll be able to spot and correct these inefficiencies. For example, could you add more resources to certain production areas or redesign your workflow to distribute the workload more efficiently?
The most powerful tool in your toolbox here is automation. It can help with tasks as simple as automating order confirmation emails to more complicated tasks like figuring out reorder points so you know when you need more product.
Either way, automation takes repetitive tasks off your team’s plate, reduces manual errors, and can result in shorter lead times.
2. Optimize your supply chain
Proper supply chain management requires a strong understanding of your suppliers and what their capabilities are. How reliable are they? Can you count on them to stick to their delivery schedules?
Working with trusted suppliers who respect your deadlines and understand your business can go a long way in minimizing lead time.
The number one strategy here is to be proactive.
Establishing open lines of communication with your suppliers will give you a comprehensive picture of your supply chain. Your suppliers will be able to keep you in the loop about potential disruptions or supply delay issues, helping you react quickly and plan more effectively.
This communication can help you address potential shortages and bottlenecks as soon as possible. But you also need to stay aware of factors that could impact your supply chain, like natural disasters or fluctuations in the market.
Regular audits of your supply chain can improve transparency, too, and help you catch potential issues before they escalate. While you can’t predict, plan for, or prevent every setback, prioritizing supply chain optimization will soften the impact on your delivery timelines.
3. Improve communication and collaboration
When you’re looking to reduce lead time, the human element is as important as any process or technology. Teams who work well together make decisions faster, resolve problems more quickly, and get things done as seamlessly as possible.
Always encourage open, transparent communication across all teams, no matter whether they’re procurement specialists, production teams, or those responsible for delivery. When one team understands what others are doing and why, you’ll enhance coordination rather than end up with a bunch of disjointed tasks.
Implementing project management methods can help with this — we're talking Agile, Lean, or Scrum, for example. These techniques can promote flexibility and better problem-solving and are designed to improve team collaboration.
Technology can also transform your production lead time through improved collaboration. With so many tools and platforms out there, it has never been easier to keep track of deadlines, responsibilities, and tasks.
4. Minimize changeovers and setup times
Another way to reduce lead time is by minimizing changeovers and setup times in your production processes.
Changeover refers to the time taken to switch from producing one product or variant to another, while setup time includes activities like adjusting machinery, calibrating equipment, and preparing materials for a specific production run.
Optimizing these can decrease downtime and increase production efficiency. Techniques like Single Minute Exchange of Die (SMED) can help you identify and eliminate non-value-added activities during changeovers, allowing for quicker transitions and faster production.
5. Set realistic delivery dates
Delivery dates that reflect your actual lead times can boost customer satisfaction since it helps you manage their expectations. It’s a much better option than giving them false hope that only leads to disappointment.
Being prompt in logging the order and getting it into the system can shave a day or more off the lead time and moves up the delivery date. As well as being quick, accuracy is key here, as error-free order processing means valuable time saved instead of correcting and reworking.
And to turn our attention back to lean processes, consider using “takt time” — the rate at which a product needs to be completed in order to meet customer demand. You can calculate this by dividing the available production time by customer demand to set achievable delivery schedules.
Deliver every package on time with Circuit for Teams
Fitting lead times into optimal time frames isn't a one-step process. It requires careful analysis, thoughtful changes, and constant improvements like accurate demand forecasting, supply chain optimization, and setting realistic delivery dates.
Mastering lead time means stretching your operational efficiency to maximum capacity while keeping customer satisfaction front and center. While the work can be taxing, it’s a worthwhile venture that does wonders for your business efficiency.
Remember, the ultimate goal is to make sure every package you handle reaches its destination within the promised time window. That’s where we’ve got your back.
Try Circuit for Teams today and let us help you streamline your lead times with ease. Every successful delivery is a promise kept, a customer satisfied, and a win for your business.
