In this article, learn about:
Different types of lead times
How lead times affect retail
Best practices in managing lead times
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Purchase Order Lead Time, or simply Lead Time, is an important part of the supply chain process. On the most basic level, a lead time is the duration between initiating a process and fulfilling it. In the supply chain, various processes have their own lead times. A Purchase Order Lead Time (POLT) refers to the time between when a supplier receives a purchase order (PO) from a retailer and when the retailer receives the product.
Think of lead times as layered on top of each other. The retailer sends the purchase order, the supplier receives it, and begins processing the product, which may include sourcing raw materials, manufacturing, packaging, etc. Then the product is shipped and delivered, and eventually a customer purchases it.
Each step in the process has its own lead time, which varies based on the type, availability, or even seasonality of the product. Between the larger steps in the process, there are even more steps, each with its own lead time: PO confirmation, invoicing, and payment, among other things.
POLT can be calculated through this formula:
Estimated delivery date – PO receipt date = POLT
This formula can be adjusted based on the type of lead time in question.
Types of Lead Times
Each retailer will have different definitions and processes for lead times, so it is important to ensure that suppliers know what retailers expect when communicating lead times.
Some common types of lead time in the supply chain are:
Customer Lead Time
Customer Lead Time is also sometimes called Cumulative Lead Time. This lead time is the time between receipt of the original PO and when the customer purchases/receives the product.
Supplier Lead Time
Similar to customer lead time, Supplier Lead Time is the time between receipt of PO and order fulfillment, but from the customer's perspective.
Order Processing Lead Time
This lead time involves the time it takes to prepare an order for delivery. Order Processing Lead Time encompasses the time between receipt of the PO, manufacturing, packaging, and preparation for delivery. It does not include delivery or fulfillment.
Production Lead Time
Production Lead Time involves the time needed to manufacture a product. This lead time does not include receipt of the PO but starts with receipt of a manufacturing order and ends when the final product is completed.
Material Lead Time
Material Lead Time encompasses the time between receipt of the PO and final delivery to the retailer, with an emphasis on sourcing materials and manufacturing.
Delivery Lead Time
Similar to material lead time, Delivery Lead Time encompasses the time between receipt of the PO and delivery of the product to the retailer. This time does not include processing the delivery, stocking the product on the shelves, or the customer purchasing the product.
Transportation Lead Time
Transportation Lead Time is the time it takes for an order to reach its final destination. This lead time encompasses shipping and any regulations the shipment may need to go through prior to final delivery. Transportation lead time will vary significantly based on how the product is transported—i.e., land, sea, air, etc.
Inventory Lead Time
Similar to transportation lead time, Inventory Lead Time involves the time it takes to receive a shipment. Think of inventory lead time from the perspective of the retailer, whereas transportation lead time would be from the perspective of the supplier. However, inventory lead time could also encompass the time it takes for a supplier to order and receive raw materials.
Upstream Lead Time
Upstream Lead Time refers to the time required to get products to warehouses, factories, or other facilities. This could include finished products, raw materials, or anything in between.
Downstream Lead Time
Once products are in the necessary supply chain facilities for production or shipment, Downstream Lead Time refers to the time it takes to get the finished product to the store shelves.
How Lead Times Affect Retail
Lead times are necessary, but well-managed lead times across the entire process, from PO to fulfillment, can keep the supply chain running smoothly. Lead times affect the supply chain process in many ways, but primarily, lead times affect inventory.
Inventory management is a constant for suppliers. Well-managed inventory allows suppliers to communicate confidently with retailers and better forecast for the future.
Short and consistent lead times allow suppliers to keep things moving efficiently and better plan ahead. Demand planning is the primary way suppliers manage and plan for inventory. To plan ahead well, suppliers need to have accurate knowledge of various lead times, ensure lead times remain as consistent as possible, and keep lead times as short as possible.
Inconsistent lead times create distrust, as retailers won’t know how long a delivery might take, even when reordering a product. For example, suppliers might incur OTIF fines for inconsistent lead times with Walmart.
Additionally, long lead times lead to customer dissatisfaction in a world that has come to expect 2-day delivery. Short lead times are ideal because they keep things running efficiently and create trust and confidence with both retailers and customers.
Knowing and keeping lead times consistent gives suppliers the tools to manage inventory without over- or under-stocking. Conversely, inconsistent lead times make inventory management more difficult and can result in over- or under-stocking. Ultimately, a better-managed inventory means fewer inventory-related costs.
Related Reading: What are the Five Types of Inventory?
Lead Time Management Best Practices
Managing lead times successfully can look like the following:
Where possible, keep the supply chain local. Keeping the various pieces of the supply chain near each other limits lead times by shortening the transportation time between facilities.
Eliminate inefficiencies across the entire supply chain. Suppliers should always assess their supply chain regularly for more efficient processes.
Utilize automation and technology. Technology and automation are ways to eliminate inefficiencies. By maximizing the use of technology and automation, suppliers can better streamline processes, eliminating unnecessary time.
Maintain flexibility. It is important to maintain flexibility and have a game plan should uncontrollable circumstances occur that extend lead times.
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