What is the lead time? Here are understanding, function and how to reduce it

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What is the lead time? Here are understanding, function and how to reduce it

What is the lead time Here are understanding function and how to reduce it

Have you ever heard or understand what lead time? The lead time is the amount of time between the initiation and process settlement. In customer service, for example, the lead time is the time between confirmed customer orders and scheduled pickup or shipping based on your business terms and conditions.

But the lead time does not apply only to customer service. Want to know what lead time is more profound? Read on this article.

What is the lead time?

Lead time refers to the time needed or planned – between the beginning and the settlement of operations or projects. This term is usually used in supply chain management, project management, and manufacturing fields.

Longer time often results in resource inefficiencies and waste, and the company must review their processing time to benchmarks to identify how to improve their waiting time.

Reducing lead time increases overall productivity, generating higher income and profits.

There are several types of lead time, but there are four main lead times for our purposes in the manufacturing or assembly environment.

  • Customer Lead Time – The amount of time needed between the order confirmation and order fulfillment (both retrieval or shipping depends on the agreement with the customer).
  • Material Lead Time – The amount of time needed to order with suppliers and receive it, starting from the confirmed order to available.
  • Factory / Production Lead Time – The amount of time needed to build and send the product if all ingredients are available.
  • Cumulative Lead Time – The total amount of time needed from the order confirmed to shipping the product if you have to order all ingredients (if nothing is available). This is the sum of material lead time and factory / production lead time.

What is the difference between Factory / Production Lead Time and Cycle Time?

Cycle Time is the amount of time needed to complete an action cycle. Settlement of certain tasks from beginning to end. More specifically it is a measurable time that explains how often a part is resolved by a particular process.

While Factory / Production Lead Time is the amount of time needed to build and send products if all ingredients are available. This includes all manufacturing, sub-assembly, and assembly processes that affect the ability to process materials into finished products.

Lead time function on business

Lead time is an important factor for customer satisfaction. Usually customers want goods or services as soon as possible with a little effort.

For manufacturing and factories, the concept of lead time has a direct relationship with the amount of inventory at various points in the entire supply chain.

If the customer’s lead time is not considered than the material lead times, the Production Lead Times, or Cumulative Lead Times, this will result in the restrained inventory in the supply chain in several or all points.

Variations and inconsistencies will often aggravate this problem – it will cause stock storage or inventory to increase the risk in the supply chain.

How does the lead time affect inventory?

Companies that secure inventory for use in production often face cases of stock when stock in the hands without new stock entry.

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Out of stock is often troublesome, because many customers must wait for orders are met, while increasing costs for the company because it may be forced to stop the production process.

The reason for the high cost during the out of stock is because employees and production machines will be silent for a while, while the company continues to spend utility costs such as electricity, water and gas, and overhead costs.

Failure to fill in stocks is largely due to the delay of the Lead Time that varies between suppliers. Some common causes of Lead Time delays include natural disasters, human errors, deficiency of raw materials, an inefficient inventory management system, and other factors.

Companies can reduce stock by using inventory management software or accounting software that have the most complete inventory features that automate the process of ordering materials.

The program stores supplier information for certain components, making it easier to order certain components when it’s almost run out. Order automatically reduces the lead time by making inventory requests quite early to avoid running out of stock, thus reducing the time and shipping costs.

For the most important components, companies can maintain a database of backup suppliers that can supply inventory when the main suppliers are not available or run out of stock.

Lead Time Component

1. Processing time: This is also referred to as planning time, and this includes the time needed to receive demand for stock, understand it and make purchase orders (when buying goods), or making work in case of a manufacturing company.

2. Processing time: Process time is the time needed after receiving a purchase order to hold or produce goods.

3. Waiting time: The time needed between the procurement of goods needed until the production process begins.

4. Storage time: Storage time is the amount of time the item stays in the warehouse or factory waiting for shipping.

5. Transportation time: The time needed goods produced to move from warehouse / factory to customers.

6. Inspection time: time spent by customers to check the product to see whether it meets the specifications. Also refers to the time needed to deal with mismatches with order requests.

How to Reduce Lead Time in Inventory Process

Here are some ways that companies can do to reduce lead time on business:

1. Reduce activities that do not add value

Companies must mapping the flow of value to identify non-value added activities that extend lead time. Prepare a list of these activities and remove activities that cannot be done by the company, and maintain activities that have a positive impact on product quality.

2. Change the shipping method

The company can also set alternative shipping methods that are faster than the current shipping method, or that offer more frequent shipping.

Suppliers may prefer slow shipping methods but produce more cost savings, which can affect the waiting time. Transitioning to a more flexible shipping method can gradually reduce time, although it may be subject to additional fees.

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3. Look for local sources

If imported raw materials are available locally, companies can switch to local suppliers, provided it does not reduce product quality. Buy products locally, not from international suppliers, reduce lead time because goods are transported in shorter distances.

4. Vertical integration

Vertical integration may involve the merger of the two suppliers or production processes. For example, where a company produces and assembles components in a separate location, it might consolidate two processes internally. This reduces the time of transporting components from one location to another.

5. Automate the process

Sometimes, the delay of the lead time is caused by human mistakes, when the person responsible for ordering delays in new stock contacts suppliers. The company can use vendor-managed inventory (VMI) or vendor-owned inventory system (VOI) to fill the stock automatically when it is almost complete.

Such a system reduces lead time because the supplier gets quite early requests before the company experiences running out of stock.

What is the impact of reducing lead time on business?

Lead Time reduction can mean the management of inventory efficiently and more cash for business. In some aspects it means fewer risks, exposure and material management.

One main exception is the reduction of customer lead time. If the customer lead time, this means making businesses better in the eyes of consumers and at the same time have a higher level of inventory so that each order can be fulfilled optimally.


That is a complete understanding of what is called lead time. If you are a business owner, especially the manufacturing business, knowing the lead time on your business is important. Don’t let you waste time generating business decisions that will affect your profits and relationships with your customers.

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