Manufacturing Lead Time A Complete Guide for 2021 [Importance, Factors & Formula]
It is important for every importer to reduce manufacturing lead time to introduce more products in the market. With more products, the importer can go ahead in the competition by introducing them at the right time.
In commerce, manufacturing lead time is an important aspect of optimizing the replenishment process using different resources. You must ensure that stock and production is moving as efficiently as possible.
Here, you will read a complete guide about manufacturing lead time and its fundamental aspects to reduce manufacturing lead time while importing products.
What does lead time mean for manufacturing?
Manufacturing lead time or production lead time is the time duration between a merchant's placing order and the manufacturer completing the order. Short production time is better than a long production lead time as it enables customers to get products quickly.
Lead time is the time to order stock and receive the products to meet customer's demands. Lead time enables the importer to arrange stock for your products before it runs out. For example, if you have a stock of products and now the stock is about to finish, you order new products before running out. The time it takes to rearrange the stock is called manufacturing lead time.
A long gap between ordering stock and getting it will be harmful to your business and useful for your competitors. Customers want their products delivered as soon as possible so you will lose customers and sales if you are unable to deliver products on time.
What are the types of Lead time?
We must know that there are different types of lead time. However, there are four primary types of lead time for the manufacturing process. The details of the types are given below:
Customer Lead time
It refers to the time when a customer confirms the order and receives the order after its processing either as a delivery or by pick up. It is the choice of the customer and depends on the agreement.
Material Lead Time
It is the time when you order a product to the supplier and receives it after manufacturing. It is the duration between confirming an order to receiving an order.
Production/ manufacturing lead time
It is the amount of time to prepare and ship a product when all the material is available.
Cumulative Lead Time
It is the total time duration when an order is confirmed, sent to the supplier, and receive the delivery when you had to order all the material. It is the addition of two processes, material lead time and production lead time.
Importance of Manufacturing Lead Time
Manufacturing lead time is a key element in international trade and shipping. The impact of this element is only beneficial when it is reduced. Here we are describing some ways in which reduced manufacturing lead time is important in businesses.
Every customer who orders a product expects to get it delivered as soon as possible. Customers will always appreciate those companies that provide goods with the least effort. This is the reason manufacturing lead time plays a great role in customer satisfaction. It also helps in establishing a long term relationship with customers.
Provides competitive advantages
Manufacturing lead time is a key element to be competitive in the market. By reducing lead time, you can get more efficient and faster output to stand in the market. It can take your business to a high level and produces more revenue.
If you plan lead time properly, it will help in meeting deadlines smoothly and consistently. It is also necessary for market competition, improving flexibility, especially when unexpected and unplanned shifts in the market.
Increase business revenue
Lead time is important when it comes to increasing business turnover. If the customers are satisfied with order fulfillment and delivery, you will get more sales and regular customers, increasing your sales and profit.
How is Lead Time calculated in Manufacturing (Manufacturing Lead Time Formula)?
When calculating the exact amount of time for the manufacturing process, it is necessary to make a list of all the goods needed for the potential job. Here are some important steps to calculate precise manufacturing lead time that you need to follow.
Plan Bill of Material (BOM)
First of all, make a list of all the materials needed to make the end product and find out its quantity needed in each element in the BOM. The list will include equipment, materials, and assembling processes for the production of finished goods.
Calculate the duration in BOM
Calculate the time required between ordering material to the expected delivery of items in the BOM. You need to include the supplier's raw material requisition, processing, and shipping while calculating this duration.
Find components with great lead time in BOM.
Make a list of the components that have a greater lead time to ensure that you have reviewed the lead time for every material. Make a list in a way to patronize with the greatest lead time.
Review the schedule of production
Review the production schedule to find out the dates and times, so you will know when these goods will be available. It also ensures the calculating of weekends and holidays to exactly calculate the schedule of processed goods.
Calculate administrative lead time
Now it's time to calculate administrative lead time. It is the time used to do the necessary paperwork and other requirements of materials purchase. Administrative time will include finding a supplier, purchasing order preparation, purchasing authorizations, and sending orders to the supplier.
Calculate time for inter-operations
In this step, you will calculate the lead time for interoperations. Here you will calculate the time required for the task to move from one work center to another during its processing.
Analyze, add, and include all the individual factors, including queue time, preparation, post-operation, waiting, and shipping time.
Calculate overall production lead time
At this final step, you can calculate all the lead time for the production process by adding different steps in lead times and finding the total time. This overall time will be the final lead time for the manufacturing of a specific product.
Manufacturing Lead Time Calculator
You can use the following calculator to calculate lead time to get an idea of how much time is required to process an item. In this way, you can tell the customers overall time to get their products.
Pre-processing time (minutes, hours, or days)=
Processing time (minutes, hours, or days) =
Post-processing time (minutes, hours, or days)=
Total Lead Time (minutes, hours, or day)= (add all the above described time to get total lead time)
Manufacturing Lead Time Example
Let me give you an example of lead time for the product toy car.
First, you need to think about pre-processing, processing, and post-processing time to calculate lead time.
Pre-processing time includes receiving the order from the customer, calculating the total number of orders of that day, and proceed sales requests to the production team. You need to calculate all the time required for these things. Assume that you need 15 minutes to complete this.
Next is the processing step that will involve cycle time and assume that it will take 10 minutes.
Now suppose you offer home delivery for toy cars. It means that the post-processing step will include delivery lead time, and it will take one day to deliver the products. Now calculate the total time.
Pre-processing time= 10 minutes
Processing time= 10 minutes
Post-processing time= One day (1440 minutes)
Lead time(manufacturing)= Preprocessing time + processing time + postprocessing time
Lead time = 10 minutes + 10 minutes + 1440 minutes
Lead time = 1460 minutes
It means that you need total of 1460 minutes to deliver the product to the customers. You can also calculate lead time in hours and days depending upon the complexity of products and distance from suppliers.
Effects of Lead Time on cost
Manufacturing lead time has a certain effect on the inventory size of a specific supplier. If there is poor management, it will lead to run out of stock, which is not good for business. It will fail to fulfill customer's demands and orders as well as the manufacturing of products.
Generally, if a person underestimates the amount of stock required to fulfill a customer's order, it will increase the cost like cash flow, turnover, and reputation.
Therefore, a clear and concise estimate of lead time will lead to getting all the necessary components arriving together. It will also decrease the cost of shipping and receiving.
On the other hand, if there is a wrong estimate about stock, it may also lead to excess stock in inventory for days or weeks, increasing the company's budget.
In short, lead time has a vital impact on the company's budget in terms of cash flow.
Shipping lead time and lead time in procurement
Shipping lead time is the time duration between sending and receiving of a specific product. Sometimes, it is also known as handling lead time.
On the other hand, lead time in procurement is the duration between the first step of initiation of the product to the time of arrival. It includes all the aspects like determine the needs, establish the product, finding a vendor, paperwork time, ordering, and paying.
In some cases, purchasing time is measured in months, but sometimes it is measured in weeks also. It all depends on product scope, quantity, quality, size, and demand.
Why should we reduce the lead time?
Reducing lead time is vital for every business type, as many commerce entrepreneurs aim to reduce manufacturing time. It will cut the time of waiting for the arrival of stock and allow great flexibility in demand and supply.
Lead time depends on your management and how you communicate your needs to your suppliers. If you tend to reduce lead time, you should focus on both ends.
Here are some of the benefits of reducing lead time.
Improve manufacturing time
If we reduce lead time, it will improve manufacturing time. It will eliminate unnecessary tasks, waiting time, and wastes in different processes. With proper management, the lead time can be reduced, and the manufacturing time can be improved.
All understand that if you sell more, you will gain more profit. If you reduce lead time in your business, it will lead your business to get super profit. Reducing lead time will lead to getting higher output and increased turnover.
When a customer orders a product, and it takes more time than anticipated for whatever reason, the customer starts looking for another alternative.
The more time the products will take to reach the warehouse, the more time the customer will find other alternatives. Finally, when the product reaches, it becomes a dead stock.
If there is a pile of deadstock, it will strain the company's budget. It will affect the budget plan. cashflow, the balance sheet of the company.
Good management leads to a reduction in lead time and lead time to observe stock variation more closely. It means that it enables you to understand the demands of the market and the process of products.
It enables you to understand the fluctuations in the market.
How to reduce manufacturing lead time?
Here are some tips that you can follow to reduce manufacturing lead time.
Order small amounts
Large orders will take more time to be manufactured and shipped. It will be better if you order a small amount and order more frequently.
This trick will be helpful to keep stock up-to-date on a regular basis. The smaller amounts will also be helpful to under the competition of the market.
What will happen if you order a large quantity but market demands fell? You will end up with dead stock, and it will cost the company's budget.
It will also be easy for manufacturers to produce and ship products without any delay.
Get a clear lead time contract.
Whenever you order your goods from suppliers, ensure that you communicate well with him to provide clear and concise details. After reaching the final decision, sign a clear lead time contract with penalties in case of delay or damaged products.
Also, mention warning of any changes in terms of price, availability, and discontinuation.
Automate Inventory management system
Err is human, so it would be better if you automate your inventory management system. Sometimes we may do wrong entries while juggling multiple suppliers. There could be chances of error while preparing a spreadsheet manually.
So, it is compulsory to go for the automation option to eliminate errors and risks. Moreover, an automated system could help you by showing notifications of reordering products to create a new order.
Provide sales data to your supplier
Businesses who consider their suppliers like a partner grow more as compared to others. The reason is if you share your sales data with your suppliers, it helps them to understand what is the demand of the market.
The manufacturer understands your needs and demand of the market and provides you the items earlier and the shortest time.
A vertical integration idea will work best for you if your company has a large capacity regarding machinery, space, budget, and human resources.
It closely observes sourcing, producing, and assembling internally. It will help suppliers to get an idea about your company. Moreover, you will fulfill market demands in the shortest time because all the factors are in your company's control.
Factors Affecting Lead Time
It is true that reducing lead time will improve efficiency, turnover, sales, and revenue of the business and increases manufacturing productivity. But there is a need to understand the factors affecting lead time. So you can optimize the manufacturing process by understanding these factors. Here are some common factors that affect lead time.
Stockouts is the worst situation in a business for manufacturers because it is impossible to manufacture products if there is no necessary parts and inventory stock available. It will not only increase lead time but also make your customers unhappy and dissatisfied.
Furthermore, it will lead to the loss of sales and customers if they decide to go somewhere else to find a new inventory.
The problem can be solved by automating your inventory management system so that you will get notified timely.
If you want to reduce lead time and work more efficiently, you need to be smarter. If you build all the parts of finished assembly, it will take a longer time to complete orders which in return will remain as dead stock because the customer will find another way.
The manufacturing process can be optimised by outsourcing some subassembly parts from others to save manufacturing time. In this way, production will take less time and lead time will decrease, and you will get satisfied customers.
It is the most difficult and unpredictable factor to control in the manufacturing process. The delay in shipping will lead to a shortage of raw materials. There are many factors that affect shipping time, including unavailability of raw material, natural disaster and human errors.
However, you can control this factor by finding suppliers close to your business. You can also choose a supplier who keeps his inventory stock on hand by monitoring demand and supply.
Inefficient Inventory Control
Inventory management system plays a great role in the manufacturing process and lead time. If the inventory system is out of control and there is negligence of employees, lead time can increase to a worse level.
Improved and efficient inventory control increases sales and customers, reduces inventory costs, and prevents dead stock. It ensures what and how much stock is available and what is needed next.
Inventory Management and Its Importance in Businesses
The inventory management system controls inventory and stock items. It includes the control of goods from manufacturers to the warehouses. It also involves sale stores with the help of suppliers and distributors.
It is significant for the business because it controls, orders, stores, and uses its inventory. Here are the benefits of inventory management in your business.
This process is more efficient and productive because it does not need manual data entries. It saves a lot of time and manages this system without any error. So it provides more time for employees to focus on other aspects rather than manual data entry.
Accuracy in order fulfillment
Inventory management keeps the stock up-to-date and helps in preventing the situation of stock out and overstocking. It timely alerts about stock data and prevents the loss of customers.
Better inventory and planning
An inventory management system helps in maintaining stock variations, and it also keeps a record of necessary products. It stores all the products which are in good condition and arrived as described. Inventory management helps create space and also cost-effective.
Customer satisfaction and management
Organized inventory management keeps the record of your customers and fulfills their requirements. It increased customer satisfaction by providing them the products they need. Hence, sales turnover increased with satisfied customers.
Saves time and money
The well-organized inventory management system saves a lot of money. It keeps you aware of the stock and availability of the products. It prevents dead stock and stock-out situations and saves your time and money.
What is Lead time in Inventory Management?
Lead time in inventory management refers to the time when an order is placed to the supplier to when an order is received. Lead time has a vital impact on inventory management and affects the amount of stock a company needs to hold at any point.
It is calculated by adding supply delay and reordering delay to get exact lead time.
Lead Time (inventory management) = supply delay + reordering delay
What is Inventory Carrying Cost?
It is the cost of all expenses including storage of non-moving or slow-moving goods. In most cases, inventory carrying cost is 20 to 30% of its total inventory cost.
There is a direct relation between inventory carrying cost and lead time. If the goods are not stored in inventory, you need to reorder products again and again, and it will increase the lead time.
What is the difference between production lead time and cycle time?
Cycle time refers to the amount of time required to complete a cycle of action. In simple words, it is the time for completion of the task from its start to its end. This measured time explains how much time is required for a part to complete by a manufacturing process.
Production lead time is the amount of time to prepare and ship a product when all the material is available. It includes all the processes, including subassembly, assembly process to build a product.
Economic Order Quantity EOQ model in manufacturing
EOQ model refers to the ideal order in terms of quantity that a company should procure to decrease inventory-related costs. EOQ helps decrease costs, like order cost, holding cost, shortage cost, and other inventory costs.
The EOQ model aims to order the right quantity of inventory according to demand and supply. This model helps a company to save money on dead stock and order inventory more frequently from the supplier.
How does the EOQ Model work in Lead Time?
It requires setup cost, holding cost, and demand rate to calculate EOQ in lead time. You must consider reordering timing, order placing cost, and storing cost.
Lead Time in Supply Chain Management
In supply chain management, lead time refers to the amount of time required to purchase all the supplies that are necessary for production processes.
In simpler words, lead time in supply chain management is the sum of supply delay and reorder delay that may occur in certain situations.
Supply delay is the time to refill your supplier from a supplier.
Reordering delay is the time to proceed before you place a reorder to the supplier. It is because a supplier takes orders once or twice a month.
Here is the formula of lead time in supply chain management.
Lead time (supply chain management)= supply delay+reordering delay
Lead time in Logistics
It is the time duration between when a purchase order is created to the supplier until it reaches the customer. To know about the logistic lead time, you need to calculate production lead time, delivery lead time, and shipping lead time, among other dimensions.
Reorder point in lead manufacturing
It is the level of inventory that reminds us to reorder the products to stock up inventory. In simple words, it does not allow stock to run out or go below the demand level.
It plays a significant role in lead manufacturing and increases efficiency and convenience by keeping the inventory stock up-to-date and balanced.
It helps in running the business without fear of stocking out and brings continuity in the business.
How to calculate the reorder point?
It is compulsory to use the formula after factoring all the components when calculating the reorder point. The most important factor to consider is safety stock levels. In this case, you need to calculate daily sales and lead times in days.
Once you determine all these important factors, you can apply the following formula to calculate reorder point.
Reorder point formula:
Reorder Point = (Average lead time by average daily usage) + Safety Stock
There is another shorter formula to calculate reorder point. But this formula does not need safety stock calculation.
Thus formula needs you to give an estimate of the maximum quantity of material you need per day. Then you will multiply this figure by manufacturing lead time. So the shorter formula be like
Reorder point = Maximum lead time by maximum daily usage
What is a safety stock and why there is a need for safety stock in lead manufacturing?
Safety stock is the extra quantity of goods stored in warehouses to prevent out of stock situations. It usually acts as insurance against variances in demand of the market.
Keeping safety stock prevents unexpected situations and will be beneficial for the business. Here are some reasons why it is needed to lead manufacturing.
- Safety stock enables you to deal with unexpected situations like fluctuations in demand and supply.
- Safety stock prevents you from stock out situations. Hence it keeps the customer service and customer satisfaction levels high.
- It prevents distractions revolving around the production and the supply of goods.
- It prevents you from unexpected situations created due to wrong calculations and mismanagement.
- It makes it easy for a business to run smoothly.
How to calculate safety stock set?
To calculate the safety stock set, you need all the necessary information related to your purchase and sales order history.
After collecting all the data, you need to apply the following formula to determine safety stock.
Safety Stock = (maximum lead times in days * maximum daily usage)- ( average daily usage * average lead time in days)
This formula makes it easy for you to calculate safety stock in case of fluctuations in the market.
What is the Optimal Safety Stock Level?
There is no certain safety stock level for inventory. It depends on the service level, and it helps in balancing inventory cost and stockout cost.
It means that the higher the service level will be, the more safety stock you need to manage.
What is Lean Manufacturing?
It is a technique used to minimize waste in the manufacturing system. Waste can be anything that customers do not add as value and are not ready to pay for it. Lean manufacturing is good as it reduces waste and increases productivity.
Some of the benefits of lean production are described below.
- It reduces lead time.
- It reduces operating costs.
- It improves product quality by eliminating unnecessary waste in the manufacturing process.
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