Many industries that were trying to meet pent up demand explosion as pandemic restrictions eased faced supply chain and manufacturing challenges because of long lead times for input materials. For example, the automotive and electronics goods industry faced acute shortage of semiconductor chips.
Clearly, lead times can have a significant impact on business operations. Amid growing economic uncertainty, businesses must have a mechanism to deal with such unexpected changes.
At the outset, they must accurately determine supply chain lead times.
Procurement and supply chain professionals must also understand factors that impact lead time and how they can reduce it, especially for critical components.
What is Supply Chain Lead Time?
Supply chain lead time is the amount of time it takes to move a product from one part of the supply chain to the next -- from a supplier to the customer. It can be defined as the time a buyer has to wait to receive a product (either an input material or a finished good) after placing an order.
No buyer and supplier would want long lead times since it results in stockouts, operational inefficiencies and wastage. It can also impact customer satisfaction if your products take a long time to reach them. In such a situation, customers may look elsewhere to buy or procure the product quickly.
Lead time includes the time it takes to:
- Source the product
- Purchase necessary components, assemble the product, and transport the product, and
- Deliver the product to the customer
What Causes Longer Lead Times?
- Raw materials shortages: Material shortages can be caused by supplier issues, natural disasters, extreme weather and other events.
- Product complexity: Products made up of many components or materials require more time for production and delivery and often extend lead times.
- Customer demand: Lead times are manageable when demand is low. But when demand explodes, there is a backlog, putting pressure on lead time.
- Production efficiency: If production processes are inefficient, it can lead to delays in the delivery of goods and services.
- Location of supplier: Lead time will be high if the supplier and the buyer are located in different regions. Longer distances mean more time is needed to deliver the product.
- Number of suppliers: When multiple suppliers are involved in the supply chain, each must complete a part of the process before the product can be delivered. This leads to delays.
What are Some Strategies to Reduce Lead Time?
- Re-visit production process: Identify and eliminate inefficiencies in production through value-stream mapping. This will help you identify activities that don’t add value. Also check if these activities can be eliminated. Look for ways to reduce steps in the production process and improve communication between functions.
- Maintain optimum inventory: Keeping the right amount of inventory on hand can reduce lead time. Don’t order raw materials in bulk. Instead, order more frequently in smaller batches.
- Automate the process: Leverage technology to automate processes such as order processing, inventory management, and product delivery. Automation can reduce lead time and errors and increase efficiency.
- Explore nearshoring: Assess the feasibility of sourcing from local suppliers. Check if raw materials for your business can be sourced locally without compromising on product quality.
- Strengthen supplier relationships: Work closely with your suppliers and encourage them to deliver components and materials on time. Offer them incentives for meeting the agreed delivery timelines.
- Reduce product complexity: This will make it easier to manufacture the product. For example, look at reducing the number of components used in the production process.
- Simplify the supply chain: Streamlining the supply chain can lower lead time. This can be achieved by cutting down the number of steps in running a supply chain and by improving coordination between suppliers and buyers.
Companies have traditionally estimated lead time by looking at past or historical data. They would analyze past orders and calculate the average lead time. While this is a useful way to arrive at an estimate, it is not accurate in all cases.
The use of advanced technology such as AI allows businesses to track products in real-time, which reduces delays. AI can also be used to predict customer demand and optimize the supply chain process.
Another way to estimate lead time is using simulations. These are used to model supply chain processes and estimate lead time based on different scenarios playing out.
Data analytics can also be used to monitor supply chain processes and identify areas where lead time can be reduced.