Lead time

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Lead time

What is lead time on an order?

Lead time is the amount of time that elapses between the point when a customer placed an order for a product and the time when the product that was ordered is delivered. The term ‘lead time’ has been borrowed from the ‘Lean Manufacturing’ method (the Toyota Production System). 

In the software domain, lead time could refer to the time that passes between the identification of a requirement and the fulfillment of that requirement. 

In simple words, the lead time is the time that it takes to receive an order after placing it. In manufacturing, purchase order lead time (POLT) is the number of days that pass between a company placing an order for the production inputs that it requires and those items arriving at the manufacturing plant. 

Lead times vary across companies and industries and are dependent on several factors like the types of products, goods, and materials being delivered, the relative abundance or scarcity of these products, goods, or materials, the areas in which the suppliers or vendors are located, and even the time of the year when the order was placed.

lead time
Source: Corporate Finance Institute

What is lead time vs cycle time? How are they different?

Lead time is the time that passes between the moment the customer places the order and the moment the order is delivered to the customer. It is the total amount of time that it takes for the customer to receive the order from the moment they put in the order for the product to the moment they actually receive the shipment. It includes all the operational processes leading up to and after the manufacturing stage.

Cycle time, on the other hand, is the amount of time that a team spends on actually producing a product up till the point where the product is ready to be delivered. It refers to the time that is taken to complete one task. The cycle time is made up of time that was spent actually producing the item as well as the wait stages (the amount of time the task is left ‘waiting’ on the board) between active work times.

Essentially, your lead time is the cycle time plus the additional amount of time it takes for the production to begin as well as the time it takes to deliver the finished goods. You measure lead time from the customer’s perspective, but measure cycle time from the internal process point of view

The cycle time helps you calculate the production rate, while the lead time provides a complete overview of the production process. The cycle time can be used to tweak the production time to suit demand, while the lead time helps improve the production rate as well as production logistics and shipment. Calculating your cycle time can give you some valuable insights that can help you adjust and improve your lead time as well.

What are the types of lead time?

The four main types of lead times are:

  • Customer lead time
  • Material lead time
  • Production or manufacturing lead time
  • Cumulative lead time

Customer lead time

This is the time between the moment when when a customer orders products from a store or a salesperson to the time when they are delivered to the customer.

Material lead time

This is the amount of time that it takes to receive the delivery of materials from a supplier after the initial order is placed.

Production lead time or manufacturing lead time

This is also known as the factory lead time. It is the amount of time that a manufacturer takes to complete an order after a merchant makes it.

Cumulative lead time

This is the amount of time that is taken to manufacture a product from start to finish. All the way  from the procurement of raw materials to the subassembly of related units.

Why is lead time important?

Lead time is extremely important when it comes to customer satisfaction. Customers tend to want their goods and services delivered to them as quickly as possible, without them needing to make any effort on their end. Lead time is also important on the manufacturing side of the world because it happens to be directly related to  the amount of inventory that exists at various points in the overall supply chain. If the customer lead time ends up being less than the Material Lead Times, Production Lead Times, or Cumulative Lead Times, you will see that inventory gets held in the supply chain at some, several, or even all points. Variation and inconsistency generally tend to amplify this issue, by causing stock or inventory to be held so as to mitigate risks in the supply chain.

Having inventory held up isn’t quite a good idea because Lean Theory considers it to be a waste. It needs manpower to move it, space to hold it, count it, transport it, maintain it etc. If it is not bought quickly enough by customers, it could end up becoming obsolete and getting written off. It also gets your business cash tied up. You would be ending up spending your business’s cash on the buying and holding the inventory instead of having cash on hand with you for other purposes.

Which are the largest components of lead time?

Largest components of lead time

Here are the largest, most prominent components of lead time:

Preprocessing time

This is the time that is taken to receive an order or request, understand it, and create a purchase order.

Processing Time

This is the time spent on producing or procuring the item that was ordered.

Waiting Time

This is the amount of time for which the item is in queue waiting for production.

Transportation Time

This is the amount of time during which the item is in transit on its way to be delivered to the customer.

Storage time

This is the amount of time during which the item is waiting in storage at a warehouse or a factory.

Inspection time

This is the amount of time taken to check the products for any sort of non-conformities or defects.

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