What is Lead Time
Lead Time is the period between the customer placing an order and the product being delivered. It begins at the initiation of the purchase process and ends at the completion of the transaction. In many ways, Lead Time is the customer’s experience of the entire manufacturing process. Customers make their order, wait for the product to arrive, and then complete the transaction with payment.
Within Manufacturing, it is critical to constantly review your Lead Times because this is how you gauge your customers’ experience. Your production process and Cycle Times could be hitting record speeds, but if Lead Times are not closely monitored, then customers may not see any of the benefits. Let’s take an in-depth look at Lead Time and how this works.
KEY TAKEAWAYS
Lead time is defined as the time from when the customer places the order to when they receive the order and payment is fulfilled.
Typically, Lead time is the addition of the Cycle Time and the delivery time.
Many factors contribute to the increase and decrease of Lead Times. These factors include material shortages, slow Cycle Times, labor issues, and more.
Shorten Lead Times by implementing modern manufacturing practices like lean methodologies and smart inventory management.
How to Calculate Lead Time
Calculating Lead Time is fairly simple. After the customer has made the order, how long does it take for them to receive the product? But depending on your manufacturing system, the calculations can be different. If calculating lead time with an already established large inventory, like the ones found under the typical push manufacturing system, your Lead Time is solely derived from the delivery or transportation time.
If calculating Lead Time from a pull manufacturing system like assemble to order (ATO) or make to order (MTO), then you need two pieces of data:
The Cycle Time of the product (CT)
The Delivery Time required to transport those units (DT)
If calculating Lead Time like this, your Cycle Time needs to start as soon as the customer makes the order.
Let’s put this into perspective. Imagine you produce high-quality customized wood baseball bats. The customer places the order on your website and then waits for the product. Your wood bats have a delivery time of 2 days and it takes 2 full days to design, fabricate, and customize the wood bat. In this case, your lead time would be calculated like this:
CT [2] + DT [2] = LT [4]
Your customers can expect a Lead Time of 4 days before they receive the finished product. This equation can be further broken down into smaller parts to identify the specific actions that add to the whole Lead Time. This can include multiple transportation lines, design phases, production phases, and more.
Takt Time vs. Cycle Time vs. Lead Time
Now that you’re able to calculate your Lead Time, you can put this information together with other Lean production metrics.
Takt Time: The needed production time to keep up with demand.
Cycle Time: The actual production time of one item.
Lead Time: The time from when the customer places the order to when they receive the order and payment is fulfilled.
Since Lead Time includes Cycle Time which is affected by Takt Time, these three metrics are closely related. Takt Time (demand) determines the optimal Cycle Time (production rate) which, in turn, affects the Lead time (how long it takes for customers to receive the product).
Once it is understood how these three work together, you can begin to see how other factors affect your Lead Time. This also enables you to find creative ways to improve your times and satisfy your customers’ expectations.
What Factors Affect Lead Time?
Since Lead Time envelopes the majority of the production process, it is unsurprising that there is a myriad of components that can positively and negatively affect Lead Time.
Common adversaries to Lead Time include:
Shortage of raw materials;
Slow Cycle Time;
Inefficient inventory management;
Breakdown of transportation;
Human errors and natural disasters
But manufacturers can combat these issues by incorporating these 4 smart manufacturing techniques.
Reducing the Cycle Time of a product: This is a key way to increase Lead Time. If the product can be produced faster and more efficiently, then customers can pull the product quicker from the production line while inventories can be more responsive to market demand. Use tools like work instruction software to speed up your production line.
Diversifying the Supply Chain: Using locally sourced parts or acquiring multiple material providers can help hedge your bets against any material shortages. This removes production stalls and subsequently speeds up Lead Time.
Efficient Inventory Management: Using automated stock replenishment systems enables manufacturers to set inventory parameters with the help of a rule engine. The system autonomously orders parts or materials when most convenient and necessary. This further removes any stalls or pauses caused by low stock.
Feeding production through a small inventory: Having already made products would be a very effective way to reduce Lead Time. Delivery would be the only factor to calculate. However, mass inventories are costly and inefficient. But manufacturers can keep a small inventory that sits between the customer and the production line. This way, when an order comes through, the customer gets their product quickly from the inventory, while production works to fill the empty space.
