Lead time has become more and more important to the average person with the growth of online retail. As large online businesses—like Amazon—grow, consumers have come to expect orders to arrive quickly. Therefore, the effects of long lead times are even more prominent.
That’s why it’s so important to ensure your business’ lead times are as short as possible! If they aren’t, you will lose customers VERY quickly.
Now let’s take a deeper dive into what exactly lead time is, why it’s important, how we can calculate it, and how to reduce it.
What is Lead Time?
Lead time is the time that passes between the beginning of a task and its completion.
Typically, people will think of lead times in terms of the supply chain such as how long it takes to receive a product after placing an order. This is true, but it is only one of the MANY definitions of lead time.
In reality, any task has a lead time.
For example, lead time can also apply in many other areas of life such as project management and goal setting.
Let’s take a look at some of these different types of lead time to get a better idea of how you can use this concept throughout your life.
Types of Lead Time
Lead Time in Supply Chain
Lead time in the supply chain is probably the most commonly discussed type of lead time. It refers to the amount of time it takes to receive goods after placing an order.
For example, if a company orders ten rolls of fabric from their supplier on March 10 and receives the delivery on March 17, the lead time is one week.
Lead Time in Manufacturing
Manufacturing departments are arguably the job function that needs to most closely monitor lead times since there are multiple components involved.
There are three parts to lead time in manufacturing:
Pre-Manufacture Time
Pre-manufacture time is the time between when you receive a customer order and when production of the product begins. This can include:
- The time it takes to get the order entered into the system
- The time it takes to receive the required raw materials for the order if they are not already on-hand
- Any waiting time before you are able to start running the order. For example, you may need to run orders for other customers first.
Cycle Time
Cycle time is the time required to complete the manufacturing process from start to finish. This includes any potential waiting time between different steps in the manufacturing process.
🤿 DIVE DEEPER: Lead time is not the only critical time metric for businesses. Learn more about how lead time interacts with cycle time and Takt time here!
Post-Manufacture Time
Post-manufacture time is the time it takes from when a product is ready for delivery at the end of the production process to when it is actually delivered to the customer. This includes:
- Any waiting time where the finished product sits as inventory until it is time for shipping
- Shipping time
Lead Time in Project Management
Project management probably isn’t an area that comes to mind first when people think of lead time, but lead time is extremely important for ensuring a project is completed in a timely manner.
Lead time in project management refers to the time needed to complete a task after it is assigned.
This can be either a small task or an extensive long-term project.
No matter how involved the task is, there is likely a reasonable timeframe that you were assigned to complete it within.
For example, your boss may assign you a simple data analysis task and ask that you complete it within two days. These two days become your goal lead time and you must ensure that your actual lead time matches this goal in order to satisfy your boss.
Lead Time in Goal Setting
Lead time in goal setting is very similar to lead time in project management, but it typically involves personal goals where you are the only one holding yourself accountable versus project management where your boss, coworkers, and company are relying on you to complete a certain task.
In some ways, setting a lead time goal for personal challenges is one of the most vital uses of lead time.
Oftentimes, people will push personal goals aside because no one else is holding them accountable.
By setting a lead time that marks the timeframe within which you want to complete a goal, you are creating a means to hold yourself accountable for the goal.
In doing so, your chances of following through with your plans and successfully achieving your goal DRASTICALLY increase!
Why is Lead Time Important?
Lead times are critical across all industries and situations to keep customers satisfied, projects on track, and costs down.
Let’s dig deeper into the 7 primary reasons why lead times are so important:
1. Customer Satisfaction & Retention
One of the main reasons lead time is so important is that it has a massive impact on customer satisfaction and retention. This is particularly important for lead times in supply chain and manufacturing.
For example, if you order something online and it takes two months to arrive, you would probably be pretty upset, right?
By ensuring your lead times are short and customers are able to receive goods as fast as possible, you will have a better chance of keeping your customer happy.
At the end of the day, happy customers are the most important part of running a successful business. If your customer’s aren’t happy, they probably won’t stay as your customer for long!
2. Beat the Competition
Solid lead times that keep your customers satisfied ultimately give you a competitive edge in your market. For example, if your competitor has a lead time of 5 days and you promise next-day delivery, you will likely win business over your competitor.
This is how Amazon has grown to be the massive corporation it is today!
3. Improve Productivity
When your lead times are clearly defined and accurate for your needs, they will also greatly improve your overall productivity.
For example, in the supply chain and manufacturing, accurate lead times will eliminate downtime due to supply delays, This ensures a higher throughput of production.
Also, in project management and goal setting, accurate lead times will improve productivity because they give you a reasonable timeframe as a benchmark for completion. This pushes a sense of urgency to work on the particular project or goal and keeps you motivated throughout the process.
4. Inventory Management
Having a clear picture of lead time also drastically benefits inventory management. This is most evident in supply chain and manufacturing lead times but can also be seen in project management and goal setting lead times.
Inventory Management in the Supply Chain and Manufacturing
Inventory is EXTREMELY expensive for any business. This is why it is listed as one of the 8 wastes of Lean manufacturing. Some reasons why inventory is so expensive are:
- It requires storage space, people to transport it, and people to count it.
- If you make too much product without a customer order, you are taking the chance that it will never be purchased and will need to be written off.
- It costs money to make and hold inventory. This money can then not be used for other purposes.
- Inventory can hide defects and other waste, such as internal quality issues, supplier quality issues, scheduling issues, setup or changeover delays, and line imbalances.
Therefore, by having a clear picture of what both your supply chain and manufacturing lead times are, you can ensure you have just enough inventory to meet customer demand. In doing so, you will avoid a lot of wasted time, money, and effort.
Inventory Management in Project Management and Goal Setting
Inventory management in projects and goals relates to limiting the number of tasks that you have in your pipeline at a time. For example, if you have one or two projects to work on with defined timeframes to complete them within, you have a better chance of efficiently completing them than if you were to instead be working on 15 projects all at once.
The same goes for goals!
If you have too many tasks or goals that you’re trying to complete all at once, you will likely struggle to focus and will waste time feeling overwhelmed or bouncing between tasks.
5. Cost Reduction
The previous two points about improving productivity and managing inventory feed into the concept of cost reduction due to accurate lead times.
For example, if you have solid, accurate lead times in place to limit downtime and balance inventory requirements, you will ultimately see massive time reduction—and therefore, cost reduction—for the process.
6. Domino Effect
Lead time also has a domino effect which makes it a critical metric to get accurate in every business.
For example, if your supplier takes longer to get you material than the stated lead time, this will ultimately affect your lead time as well as your customer’s lead time and so on.
This domino effect was seen on a global stage back in March of 2021 when a container ship blocked the Suez Canal for nearly a week. Roughly 12% of global trade moves through this canal which led this event to have massive cascading effects on nearly all industries.
7. Project Progression
This domino effect of lead times is also seen in project management.
For example, say you are working with a team to install and qualify a new production line. Before the product qualification can begin, the line needs to be fully installed and operational.
Therefore, the team in charge of the product qualification needs an accurate lead time from the installation team in order to keep the project progressing smoothly.
If this lead time is inaccurate, it will have massive cascading effects. For instance, the qualification will be delayed which will impact profitability and could lead some resources to be unavailable since the timeframe for the project will need to shift.
Now that you know why having an accurate lead time is so important, let’s look at how to calculate lead times in different situations…
How Do You Calculate Lead Time?
Overall, lead time is a relatively straightforward calculation once you have identified what type of process or business function you are calculating it for.
Lead Time Formula in Supply Chain Management
For example, if you are a customer ordering a product from a supplier, the lead time formula is:
Lead Time = Order receipt date – Order placement date
For example, say you order 20 drums of material from a supplier on March 1 and you receive them on March 10. In this case, you can calculate lead time as follows:
Lead Time = March 10 – March 1
Lead Time = 9 days
Lead Time Formula in Manufacturing
If you are a manufacturer who wants to calculate the lead time for an order you just received from a customer, the lead time formula is:
Lead time = Pre-Manufacture Time + Process Cycle Time + Post-Manufacture Time
For example, if it takes you 3 days to get an order entered into the system and start production, 2 days to produce a finished packaged product, and another 2 days to ship the product to the customer, you can calculate lead time as follows:
Lead Time = 3 days + 2 days + 2 days
Lead Time = 7 days
Lead Time Formula in Project Management
When it comes to project management, the lead time formula is very simple:
Lead Time = Task/Project Completed Date – Task/Project Assigned Date
For example, say your boss assigns you a project on October 1 and asks you to complete it by October 31. In this case, you can calculate lead time as follows:
Lead Time = October 31 – October 1
Lead Time = 30 days
Lead Time Formula in Goal Setting
The lead time formula in goal setting is very similar to that of the project management formula.
The only difference is the terminology since a task is typically assigned by another person, such as your boss, in project management whereas goal setting refers to a challenge that you set for yourself.
Therefore, the lead time formula in goal setting is:
Lead Time = Goal Completed Date – Goal Set Date
For example, say it is December 1, and you set yourself the goal of learning to play a new song on the piano by the end of the year. In this case, you can calculate lead time as follows:
Lead Time = December 31 – December 1
Lead Time = 30 days
Lead Time Reduction
As we have discussed throughout this article, having short, accurate lead times is critical to ensuring you maintain customer satisfaction and achieve optimal productivity.
So what happens if your lead times are longer than you or your customers would like them to be?
Here are three key methods you can use to reduce lead times:
1. Eliminate Waste
Waste reduction must always be a key consideration when you are looking to improve the efficiency of any process.
One of the five main principles of Lean manufacturing is defining value. This means that all non-value add steps in a process must be reduced or eliminated in order to reach optimal efficiency.
In particular, Lean manufacturing highlights 8 wastes that you should target when looking for inefficiencies in a process. These 8 wastes of Lean follow the acronym “DOWNTIME”. They are:
- Downtime
- Overproduction
- Waiting
- Non-Utilized Talent
- Transportation
- Inventory
- Motion
- Excess Processing
🤿 DIVE DEEPER: Click here to learn more about the 8 wastes of Lean and how to identify and reduce them in your work and personal life.
2. Tighten Supply Chain Management
Another way to reduce lead time is to evaluate your suppliers and overall supply chain management.
As we discussed earlier in this article, the domino effect has a dominant effect on lead time. Therefore, you need to address any bottlenecks that are occurring in your supply chain that could cause delays.
For example, you can:
- Source locally
- Create contracts with suppliers that have defined timeframes for shipments and penalties for delayed shipments
- Evaluate shipping methods such as ground vs. air shipping
- Analyze order size and frequency
- Consider vertical integration
3. Use an Inventory Management Software
The final method that can drastically improve your lead times is using inventory management software.
Many businesses still rely on manual data entry, planning, and scheduling which is not only extremely time-consuming, but it also leaves a lot of room for human error.
In order to make your forecasting, planning, and scheduling as accurate as possible in significantly less time, you should consider using one of the many inventory management programs that exist today.
Conclusion
Lead time is a critical metric for the success of any business or project. Therefore, gaining a better understanding of what lead time is and why it’s important will guide you to areas for improvement in your own work or personal projects.
Ultimately, establishing an accurate lead time and reducing long lead times will help you to gain customer loyalty, complete projects and goals in a timely manner, and increase your overall productivity and efficiency.
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