As the old saying goes, “time is money,” and that’s never truer than when it comes to talking about manufacturing lead-times.
Customers expect to purchase and receive products in a timely fashion, so understanding what lead-time is, how you can decrease it, and how it can impact the customer experience are all insights that can help you take your business to the next level.
Today, we’ll talk about how to better understand lead-time so you can use it as another tool to better manage your inventory.
What is Manufacturing Lead-time?
One of the most common questions whenever this topic comes up is simply, “What is lead-time?”
We can define lead-time as the amount of time it takes you to receive stock or materials from your supplier. It can also cover the amount of time from when a customer places an order for a product you sell until they actually receive it.
And beyond that, lead-time actually breaks down into different categories (which we’ll be discussing later in this article), including manufacturing lead-time.
Manufacturing lead-time is best described as the time it takes to create a product and deliver it to the consumer. As mentioned earlier, this can involve how long it takes to get the materials and products from other suppliers if you aren’t making your offering entirely in-house.
It may feel like manufacturing lead-time is something beyond your control if you’re relying on outsourced products or materials. However, even if you can’t make your supply chain work faster to suit your needs, you can actually control how lead-times affect your business once you have an understanding of how long it will take on average to complete the manufacturing process.
What are Other Types of Lead-times?
As mentioned earlier, manufacturing lead-time is a bit of a catch-all term. There are other types of lead-time we should discuss before moving forward.
Here are some other types of lead-time and what they represent.
1. Throughput time
First we’ll talk about throughput time, which is defined as a way to calculate the rate and efficiency that your products and materials pass through your manufacturing system. This is also commonly referred to as cycle time.
In essence, throughput time looks at your entire manufacturing process and makes sure everything is running as smoothly as possible. If there’s a bottleneck in your system, you’ll want to find it and correct it.
Here are some of the areas a typical throughput time analysis looks at:
- Process time
- Inspection time
- Move time
- Wait time
In practical terms, it breaks down like this:
Process time is the amount of time required to actually manufacture the product from start to completion.
Inspection time tracks the amount of time the completed product spends waiting for final inspection after the manufacturing is complete.
Move time tracks how long it takes the finished product to get from manufacturing and inspection to the warehouse where it will live until someone orders the item.
And finally, wait time is how long the item sits in that warehouse before the item moves to a customer.
If you’re looking to apply lean manufacturing principles to your business, you’ll want to study your throughput time in detail. Decreasing time at each stage can have a dramatic effect on your bottom line.
2. WIP and Production Lead-time
Next we come to WIP and production lead-time.
WIP stands for work in progress, and it’s a way to measure all of your products that are currently in manufacturing but aren’t ready to move on to being part of your for sale inventory.
It’s interesting to note here that if you know your WIP lead-time, it’s possible to calculate your production lead-time using this formula:
Lead-time = works in progress/average production rate
Here’s an example:
If you have 750 widgets currently in production, and you complete 25 widgets per day, your lead-time is 30 days.
750/25 – 30.
Of course, there can be fluctuations in your work in progress completion time, but this can give you a general idea. The main goal here is to have a general understanding of how long manufacturing and assembly takes.
Why is it Important to Reduce Lead-time?
At this point, many businesses ask if they should actively try to reduce lead-time. And the answer is a resounding yes.
While knowing your lead-times is great and allows you to meticulously manage your inventory, we should always be striving to decrease the amount of time we spend producing products. Here are a few of the reasons why.
- Greater flexibility in rapidly changing markets
- Outpace your competition
- Quicker replenishment of stock to avoid stockouts and backorders
- Potentially reduced carrying costs
These are just some of the reasons you should be working to reduce lead-time. The common thread in all of these examples is that they allow your business to either make more money, or in the case of reduced carrying costs, spend less.
That alone should inspire you to think about how to reduce your manufacturing lead-times. Simple reductions in this metric can have an impact on your company’s finances.
How Can You Reduce Manufacturing Lead-times?
Now that you have an idea of why you’d want to reduce your lead-times, let’s talk about some of the steps you can implement to make that goal a reality.
1. Order smaller amounts
If you’re only placing gigantic orders when it’s time to replenish products or materials, you may be inadvertently increasing the amount of time it takes to get those orders fulfilled.
Instead of doing one giant order, consider taking a more agile approach and breaking up your invoices into smaller amounts. This will help your supplier fulfill your orders more quickly, and allow you to reduce your lead-time by a potentially significant margin.
Unless you’re getting some sort of bulk order discount, going with smaller and more frequent orders can really help you cut manufacturing lead-time. This should be one of your first considerations.
2. Use a lead-time contract
You should have a contract with every supplier you work with, and this contract should be extremely clear on the penalties for late or damaged shipments, delays, and things of that nature.
You should also clearly spell out terms for price change and discontinuation notifications so you’re not caught off-guard.
Having a clear contract can ensure that delays don’t happen. Delays can wreak havoc with your business’s lead-time.
3. Use inventory management software
If you want to hit the “easy button” and reduce the chance of human error that happens whenever there are multiple spreadsheets involved, consider investing in inventory management software.
There’s a software solution out there for every budget, and utilizing these tools can help you stay on top of your supply chain with a lot less headache.
4. Consider your supplier a partner
Have you considered sharing your sales data with your suppliers? Odds are you probably haven’t.
However, sharing sales data with your suppliers not only makes them feel like legitimate partners with you in your business ventures, it also gives them insights into how your business works. This can allow them to anticipate needs before you actually contact them.
With suppliers who understand your business and anticipate your needs, you can dramatically reduce your lead-time.
Manufacturing lead-time is one of those metrics that is easily lost in the shuffle of day-to-day business operations. For whatever reason, most businesses simply accept the current lead-times quoted by their suppliers and will even expect the occasional delay.
This is not a good precedent. Decreasing your manufacturing lead-time can help you boost sales in a wide variety of ways, while also helping you save money by streamlining your inventory management so you’re not paying to carry stock you don’t need. That’s a win-win situation, but you’ll need to understand and take control of your lead-times to make it work.
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