Lead Time in Manufacturing
Lead time can have different definitions depending on the industry. In manufacturing, lead time refers to the time it takes to make a product and deliver it to a customer. To calculate lead time, manufacturers add the time it takes to procure raw materials to the time it takes to make the items and the time it takes to inspect, ship, and deliver the finished products.
Lead time affects not only manufacturing processes but also other aspects of production, such as supply chain management and project management. By comparing the actual timelines against established benchmarks, it’s easy to determine if a manufacturing process is efficient.
Manufacturers need to reduce lead time, as doing so improves productivity, boosts output, and increases revenue. They achieve shorter lead times by implementing strategies like automation and lean manufacturing.
Longer lead times negatively affect the entire manufacturing process, thereby affecting sales. Common reasons for long lead times include raw material shortages, delays in procuring raw materials, labor shortages, transport delays, human errors, and natural disasters.
What Is the Definition of Lead Time?
According to Investopedia, lead time refers to the duration required to complete a particular process. These processes include manufacturing a product, delivering goods and services, or a combination of both.
Businesses that reduce lead time usually have less finished inventory on hand, more effective processes with fewer costs, and in turn, more satisfied consumers. Lead time can have numerous definitions, depending on the context.
- Customer lead time is the duration required to fulfill a customer’s order.
- Factory (or production) lead time refers to the time a manufacturer takes to complete an order after a customer accepts it.
- Material lead time is the time it takes to receive parts or materials from a supplier once they accept the manufacturer’s order.
- Cumulative lead time refers to the total time required to manufacture a product from start to finish, including the time it takes to obtain the parts and raw materials to make the product.
Therefore, the total manufacturing lead time involves sourcing materials and parts, preparing raw materials and parts for the production process, processing the parts and materials into finished products, inspecting the products for defects, and finally shipping the finished goods to the customer.
Why Is Lead Time Important for Manufacturers?
Lead time is a critical metric for manufacturers to monitor. Here are some reasons why it’s so important:
- Increased customer satisfaction: Manufacturers who can reduce lead times below the industry average can better satisfy their customers. If customers receive their orders faster than they anticipated, it will doubtlessly leave a good impression. Good impressions build a clientele of repeat customers and drive more referrals, ultimately increasing sales.
- Less waste: Many products have expiration or best-by dates. If their manufacturers cannot sell them by those dates, they must dispose of them. Short lead times increase the likelihood that these goods will sell before those dates, reducing waste and boosting revenue.
- Lower labor costs: Increasing efficiency during the manufacturing process reduces lead times. That efficiency, in turn, can reduce the need for extra labor. For that reason, manufacturers must review internal processes to identify inefficiencies that slow down lead times and increase labor costs.
- Greater capital efficiency: Shorter lead times can also boost capital efficiency. Since shortening lead times increases process efficiency, manufacturers can release cash that is tied up in excess inventory and redirect it to other critical processes. Manufacturers with more capital can redeploy it to research and development, marketing, product expansion, and other areas that generate a higher return on their investment.
Order Lead Time vs. Production Lead Time
Manufacturers break down lead times into two types: order lead time and production lead time.
- Order lead time refers to the elapsed time between when a customer places an order for a product and when the customer receives the product.
- Production lead time refers to the time it takes for a company to manufacture a product once it has received all the necessary raw materials, components, and customer orders.
Lead times play a significant role in manufacturing. Shorter lead times enable companies to balance their production, inventory control, and delivery schedules, meeting customer demands while minimizing excess inventory and reducing costs. Long lead times, on the other hand, lead to excess inventory, higher carrying costs, and decreased customer satisfaction.
One of the primary ways companies reduce lead times is through the application of lean manufacturing principles. Following these principles eliminates waste and improves efficiency, creating a more streamlined and efficient production process. In a lean manufacturing system, manufacturers only purchase and use raw materials as needed. This allows them to reduce their inventory levels and minimize production lead times.
To further optimize their lead times, companies may utilize various tools and systems, such as Kanban, a system that signals when the company needs to replenish its inventory, or material requirements planning (MRP) software. These tools enable companies to calculate their lead times, production schedules, and inventory levels, ensuring they can meet customer demand while minimizing waste and maximizing efficiency.
Other factors impacting lead times include raw material sourcing, inventory control, production processes, shipment and delivery times, and production system constraints, among others. By reducing variability and optimizing production processes, companies can continually improve their lead times and manage their supply chain more effectively.
By optimizing their inventory control, manufacturing processes, and supply chain management, companies can minimize lead times, enhance customer satisfaction, and cut costs, ultimately leading to increased profitability and sustainability.
How Do These Factors Impact Lead Times in Manufacturing?
It’s critical for manufacturers to understand how the factors below impact lead time. With this information, companies can adjust or automate processes to make them more efficient, switch to alternative materials or parts suppliers, or modify inventory control practices to optimize their operations.
1. Raw Material and Parts
One of the most crucial factors determining lead times is the availability of materials and parts. Even though most manufacturers prefer to keep some stock on hand, some materials are rare and difficult to source. Other suppliers move too slowly to meet deadlines, as do some of the services shippers use to transport materials and parts to the manufacturer.
2. Machine and Operator Setup
Manufacturers should set up production lines well in advance of the scheduled time, allowing for some flexibility in case any issues arise. Predictive technology can help detect potential problems in the process and allow teams to address them beforehand. With these proactive steps, lead times will likely shorten.
3. Special Orders
Some manufacturers expedite special orders for their top customers. However, moving these jobs to the front line can result in added costs and longer lead lines for other customers. Having a plan in place for handling these orders can help maintain a normal production pace.
4. Secondary Part Processing
After the manufacturing process is complete, some parts may require secondary processing, such as finishing, smoothing, or heat treatment. Each of these processes will also need to streamline its lead time, so manufacturers must factor the time it takes to execute these into the project’s total lead time.
How to Calculate Lead Time
In the manufacturing industry, lead time is a critical metric that has a direct impact on a manufacturer’s ability to meet customer demand. Calculating it is essential to gain a solid edge over its competitors.
Here’s the formula:
Manufacturing Lead Time (MLT) = Pre-Processing Time + Processing Time + Post-Processing Time
Pre-Processing Time
The pre-processing time begins when a manufacturer places an order for raw materials for a specific product. It ends when the raw materials arrive at the facility. In this stage, the manufacturing process has not yet started.
Processing Time
The processing time refers to the actual time it takes to complete a finished product. It begins when a manufacturer receives the raw materials or parts and ends when the product is ready for inspection and shipment.
Post-Processing Time
The post-processing stage includes inspecting the finished product, packing it, and shipping it to the customer. It begins the moment the product leaves the production line for the inspection process and ends when the manufacturer releases the product to the shipper.
Calculating the Total Manufacturing Lead Time
It takes the XYZ Manufacturing Company 2 weeks to complete the pre-processing time, 3 weeks to complete the processing time, and 1 week to complete the post-processing time. Here’s how the company would calculate the total manufacturing lead time:
Let T1 = the pre-processing time.
Let T2 = the processing time.
Let T3 = the post-processing time.
Let MLT = the total manufacturing lead time.
Following the formula MLT = T1 + T2 + T3 and plugging in the actual numbers, the calculation would go like this:
MLT = 2 weeks + 3 weeks + 1 week = 6 weeks
Therefore, the total manufacturing lead time for the XYZ Manufacturing Company is 6 weeks.
11 Ways to Reduce Manufacturing Lead Times
Manufacturers use various strategies to minimize manufacturing lead times. Here are some of the most effective ways to shorten lead time and streamline the production process:
- Order in Small Batches
Placing orders for large quantities of parts or raw materials often increases the time it takes the supplier to fulfill the orders. A more agile approach would be to split those orders so that the supplier has a better chance of fulfilling them more quickly, thus shortening the lead time. However, if the supplier offers discounts for large orders and has the items in stock, it might be more prudent to order in bulk. In most cases, though, when lead time is of the utmost importance, small batches should be the norm.
- Make Binding Contracts with Suppliers
Manufacturing companies that establish legal contracts with their suppliers at the outset of their relationship ensure that the suppliers under contract will do everything possible to deliver materials on time and in good condition. Contracts with suppliers should clearly outline penalties for delays, late shipments, or damaged goods.
- Utilize Inventory Management Software
Using inventory management systems can help companies mitigate lead time issues caused by human error and other inefficiencies. Instead of using a spreadsheet to track lead time, inventory management software streamlines the process and thereby shortens it.
- Partner with Suppliers
Partnering with suppliers can also help shorten lead time. By treating suppliers as part of the team and providing them with access to essential data, such as inventory levels, manufacturing companies put them in a better position to anticipate future needs.
- Keep Safety Stock On Hand
Having safety stock available in case of supplier delays or damaged materials is another way to reduce lead time. This stock acts as a buffer, enabling companies to continue fulfilling orders while they wait for a new supplier or for the current supplier to fulfill the order.
- Consider Domestic Suppliers
Raw materials sourced overseas are prone to delays due to cumbersome logistic processes, long distances, shipwrecks, and international trade disputes. Using domestic suppliers, if available, solves this problem.
- Use Sales Forecasting Data
A lack of sales forecasting information or the tools to process it can also result in longer lead times. When manufacturers are unsure of the sales volume they can expect during specific periods, they can’t plan materials and parts orders accurately. Using tools to gather and analyze sales forecast data helps anticipate needs and reduce fulfillment time.
- Have Standard Components Ready
Manufacturers that make customized products can reduce production time and lower costs by having standard components on hand. Collaborating with suppliers to ensure that even custom product designs can utilize standard components helps reduce lead time without compromising on quality.
- Use Backup Suppliers
Companies should establish relationships with multiple suppliers of raw materials and parts. If their main supplier fails to deliver, a plan B will be in place to ensure that customers receive their finished goods on time. Supply chain management software helps to streamline the complexity of dealing with multiple suppliers.
- Incentivize the Process
Partnering with multiple suppliers drives competition among vendors. Providing them with extra incentives, such as bonuses for completing orders ahead of schedule, can further motivate them to expedite orders, ensuring they do everything possible to meet deadlines.
- Maintain Open Communication Channels with Suppliers
Besides partnering with suppliers and providing them with access to inventory levels, it helps to keep communication channels open to ensure that vendors meet expectations and handle any issues that arise promptly.
5 Reasons Why Lead Time Can Be a Manufacturer’s Nightmare
Predicting delivery dates can prove a challenge for manufacturers. Regardless, the manufacturers do not have complete control over the lead time when outsourcing materials and products. Even internal factors can affect a supplier’s ability to deliver on time, resulting in slower lead times — and stress for the manufacturing company’s leadership.
- Raw Materials or Parts out of Stock
This situation is one of the most disastrous things that can happen to a manufacturer. When raw materials or parts are out of stock, it is impossible to produce goods, causing production delays and longer lead times, as well as higher costs.
- Variability of Lead Time
When outsourcing parts and materials for products, manufacturers must depend on the supplier’s lead time. Supplier lead time can vary from one supplier to another, depending on the efficiency of their internal processes. Thus, it can be quite a challenge for a manufacturer to coordinate production processes on its end, especially if the supplier is new.
- Quality Control Failures
As soon as a product leaves a manufacturer’s production line, it undergoes a thorough inspection to identify and eliminate any defects before the company ships it to its customers. If a product has a defect, it either ends up in a waste pile or undergoes a corrective process. Either way, the manufacturer must either remake the product or correct the defect, which lengthens the lead time.
- Shipping Delays
Shipping delays are a major cause of lead-time headaches for operations management teams in manufacturing companies. They’re highly unpredictable and can have a myriad of causes, such as materials or parts defects, natural disasters, or logistical roadblocks, all resulting in a longer lead time for the manufacturer.
- Contract Violations
When suppliers fail to meet a contract with a manufacturer to deliver parts or materials within a specific deadline, it can slow down the manufacturer’s lead time or even halt production. Unless the manufacturer finds a workaround — such as having an alternative supplier who can deliver the same parts or materials quickly — such a situation can cause the manufacturer to breach any contracts it has with its customers.
In Conclusion, Lead Time Plays a Crucial Role in the Manufacturing Industry
Indeed, reducing lead time is critical in meeting customer demands. With strategies in place to streamline ordering and manufacturing processes, reduce errors, and provide backups in case of supply chain disruptions, manufacturers can significantly shorten their lead times.
If you’re a manufacturer who needs to slash your lead time, AI-powered software that can optimize sales inventory and operations planning (SIOP) can help you carry out those strategies efficiently. To learn more about Eyelit Technologies’ suite of SIOP software and other manufacturing-specific tools, get in touch with the team today.