When you work with suppliers, you’ll definitely ask them, “How long will it take for me to receive the goods?” This brings us to today’s topic—lead time in the supply chain.
What is lead time in a supply chain?
Lead time in a supply chain refers to the time needed from when a customer places an order until they receive the product. It mainly includes three stages: sourcing raw materials, production, and transportation.
For example, if you order goods from a factory in China and the factory promises a lead time of three months, this lead time refers to the time from when you place the purchase order to when you receive the product. Adding the time it takes to deliver the goods to your customer makes up the entire lead time in the supply chain.
Why is lead time in a supply chain important?
Every role in the supply chain, such as buyers, factories, and retailers, needs to understand lead time clearly to better plan their production, optimize inventory, and reduce the risk of delayed deliveries.
This is especially crucial in international sourcing, where there are more steps and more potential issues, like raw material shortages at the factory or production scheduling delays that extend waiting times. Additionally, international transportation can often be disrupted by factors beyond control, further extending your lead time and increasing costs. Therefore, when stocking up, don’t rely strictly on your estimated time; instead, allow some extra time to mitigate potential delays.
For example, many of our customers who sell Christmas products start ordering from China in March or April each year to give themselves ample stocking time. They don’t wait until the second half of the year to start purchasing, as that would be too late.
What are types of lead time?
Lead time in the supply chain is a long timeline, so suppliers and buyers often divide it into several types. Here are three main types of lead time in the supply chain.
Material Lead Time
This includes the time manufacturers need to prepare raw materials (such as main materials and auxiliary materials).
This refers to the time required for the factory to produce the product. It includes receiving the production order, preparing raw materials, mass production, quality inspection, and product packaging.
Delivery Lead Time
Delivery lead time has different meanings for consumers and purchasers and it mainly focuses on delivering to end customers. For consumers, it means the time from when the retailer ships the product to when they receive it, which is also known as fulfillment time. Sometimes, purchasers also use this term. For purchasers, it means the time from when the factory finishes producing the product to when the purchaser receives the goods.
Lead Time in Logistics
Lead time in logistics has a broader scope and covers transportation at all stages of the supply chain. It is often used by purchasers to refer to the time it takes for manufacturers to transport goods to the purchaser’s warehouse. Sometimes, it can also refer to the time it takes for products to be transported from the purchaser’s warehouse to customers.
What stages does lead time include? How to calculate lead time?
Lead time in a supply chain includes several detailed stages, and the time taken for each stage affects the total lead time.
- Order processing time
- Raw material preparation time
- Production time
- Packaging and loading time
- Transportation time (International and domestic shipping)
- Fulfillment time to the consumer
How to reduce lead time in a supply chain?
1. Find reliable suppliers
As a buyer, you need to find suppliers who can deliver on time, communicate promptly when issues arise, and are willing to cooperate with your suggestions. This ensures timely delivery. If necessary, establish and optimize Supplier Quality Management (SQM), stay in frequent contact with suppliers, and monitor the production process in real-time to ensure the product can be delivered within the lead time.
2. Reduce inventory and shorten supply cycle
You need to stock based on the sales of your store to avoid overstocking or understocking. You can negotiate with your supplier to use the Just-In-Time principle, ordering in small batches and only when needed to reduce inventory buildup, thereby shortening lead time. This process requires active cooperation from the supplier, which is more likely if you have long-term orders with them.
3. Optimize supply chain processes
In the supply chain, you can’t only focus on the efficiency of transportation and production; improving order processing efficiency is also very important. When your business grows a bit, you can use smart software to monitor inventory in real-time and automate order processing, thus speeding up the entire order processing stage.
FAQ
What is lead time in inventory? How to calculate?
Lead time in inventory refers to the time interval from when a buyer places an order with a supplier to when the product arrives at the buyer’s warehouse. This process covers the period from purchasing to warehousing. Determining lead time in inventory is crucial for optimizing inventory management.
Formula: Lead Time in Inventory = Product Arrival Time – Order Receipt Time
How does lead time in supply chains relate to production lead time?
Production lead time is a stage within the overall lead time in the supply chain. It includes the time from when the manufacturer receives the product order to when the final products are produced.
What is the difference between delivery lead time and lead time in supply chain?
Delivery lead time is a phase within the broader supply chain lead time.
Delivery lead time refers to the time from when the product is shipped from the factory to when the customer receives it. For a purchaser, delivery lead time is the period from when the factory completes production to when the purchaser receives the goods. For a consumer, delivery lead time is the time from when the retailer ships the product to when the consumer receives it.
Supply chain lead time encompasses the entire process from when a customer places an order to when the order is fulfilled, and its scope is larger.
