You cannot lose sight of procurement lead time when monitoring your operations. In a competitive market, every detail makes a difference. And to keep a business’ economic sustainability and its customers satisfied, companies are pressed to keep costs down and do fast deliveries. After all, consumers are increasingly sensitive to time.
Meanwhile, in order to balance expenses, companies must find ways of managing their inventory correctly, as missing materials will impact production and can lead to delays – which is unsatisfactory for supply chain flow.
A stock with an excess of items is a terrible sign for businesses: after all, idle products affect the company’s turnover, generate more storage costs, and can even cause financial loss. In this scenario, it’s critical for the company to know procurement lead time, for the best operation possible of its supply chain.
So, if you want to know more about this indicator and its importance for your business, read the explanation that follows and understand why!
The concept of lead time in procurement
This concept refers to supply time, i.e. the total time it takes to deliver a product to the end consumer, through all stages of production, from the moment it’s ordered. Awareness of this data is vital to the success of a manufacturing project. With it, managers can better plan all material procurement procedures, and ensure an ongoing operation flow.
Lead time is a term brought from Production Engineering. In a very simplified way, it can be understood as the period elapsed from consumer order to delivery of a product or service. However, taking into account this basic definition, we can explore other points and understand it more deeply.
Some executives can think that the solution to decrease lead time – and thus offer faster deliveries – is the tactic of keeping inventories at high levels. However, besides being a risky maneuver, this strategy doesn’t actually solve the problem.
Lead time scope
In fact, customers may have a positive perception about delivery time, but the company’s lead time isn’t reduced at all with this action. This is because to better understand this concept in the real world, we must see it as the time an item takes to go through all the production steps within the supply chain. In this way, crowded stocks only “mask” the problem, and create a kind of product queue, increasing crossover time rather than decreasing it.
Orders of products that cannot be fulfilled from inventory and must be manufactured or purchased from a supplier require a longer lead time, which should be well planned to properly meet consumer expectation.
In short, lead time is the period of time spent by the production system, in order to transform inputs into finished products, ready for delivery.
This process involves a number of crucial steps in a business, such as procurement management, supplier management, and supply chain management. In a certain way, it’s an indicator that involves logistics too, as it includes the transport of raw materials, assembly lines and storage.
Why it’s important in management
The awareness of a company’s lead time urges managers to better reflect on every step that a product takes until its delivery to the customer. Therefore, if this rate is unfavorable, solutions can be conceived and initiatives implemented to force the reduction of such period. It’s even possible to do this by identifying and eliminating errors, bottlenecks and waiting times throughout production.
From the moment a company’s lead time is discovered, their executives can strive to adopt a leaner and more productive supply chain methodology, in order to decrease supply time and delivery time to the customer. This commitment will translate into more satisfaction from consumers, who will become loyal to the brand.
Lead time supports also planning and organization of supply chain management.
If the procurement area knows this period exactly, they can use this data to analyze the purchase of the necessary materials and determine the correct time to make a new purchase – so the inputs are available for use at the right time, without causing lack or excess in stock.
It’s obvious that disregarding these data or calculating procurement lead time incorrectly may cause a messy production.
Purchasing products well in advance isn’t effective: materials can arrive much earlier than expected, and then must be stored in stock. This is extremely harmful if the items are perishable or toxic, for instance. Additionally, the accumulation of inputs can disrupt other processes.
For this reason, the more information, control, and accuracy in procurement and supply chain management, the better the definition of lead time and process alignment. The operation flow will then run more smoothly.
Factors that influence lead time
As we have seen, lead time involves many processes in a production chain; so there are many factors that can affect and change the period that a product takes to be finished and delivered. See below some factors that impact this indicator:
Managing suppliers is a crucial point in any supply chain. Companies have realized the strategic value of a good supply source long ago.
Being able to have the best contacts from suppliers and a varied portfolio is great for businesses, as they manage to guarantee the best cost-effectiveness in orders, in addition to more attractive payment modes and favorable production times.
Therefore, a supplier with problems or without the necessary expertise on the segments – and the offered products – can suffer a negative impact on lead time.
An important role of the procurement area is knowing how to choose contacts and seeing to that the relationship with key suppliers is beneficial, based on partnership.
In times of urgent orders, these service providers – with whom your company keeps an excellent relationship – will most likely be available to help and accept such urgent orders, as a support that can restore your lead time.
If a supplier is not meeting the deadlines, the best thing to do is cancelling the orders and look for another contract.
Geographic location of supplier
A supplier who is situated in a geographically unfavorable site or very far from the factory can create lead time problems. To deliver products on a timely basis, the cycle must consider transport logistics.
No matter if it occurs by land, sea or air trips, the transportation of products always involves a series of unforeseen events and risks. Thus lead time must be calculated based on this variable too.
It’s best to look for suppliers located in places that require as little transportation as possible. If value and quality of the input make up for it, it will be worthwhile doing business with that supplier; then production planning must be adjusted, taking into account a longer lead time.
Logistic managers plan the shipment of goods that will be transported every day, taking into account a number of variables such as destination, volume and product nature, among others.
So keeping track of the dates on which the orders are placed is essential to a correct lead time calculation. Depending on the day of a given purchase, it may need to wait some time to be shipped and sent to destination.
Internal Revenue Service
The IRS is the government agency in charge of the tax office and cargo inspection, and their actions are, alas, unpredictable. That is, there’s no way to predict whether inspectors will conduct a more detailed analysis of certain goods, delaying the entire process and their arrival at the final destination. Therefore, it’s necessary to consider this possibility when determining lead time.
The correct calculation of deadlines
Knowing how to properly calculate lead time is a practice that brings many benefits to company operations and customer service. This awareness is very opportune for the company’s strategic planning. See how to determine these deadlines:
Make a list of all ordered products
Create a list containing all the purchased raw materials to manufacture each item that will be sold. This table should also include repair or installation services, if these procedures are required to finish the product.
Know the required procurement period for each item
In the same table, organize the time required for the arrival of each material. An order may take about 5 days or more to be fulfilled. Calculate a safety margin of a few days, taking into account unpredictable transport issues.
Another important point to consider is whether the supplier works on business days only, for instance. In this case, don’t include weekend days in this forecast.
Separate all items with longer lead times
Items with longer lead times should be highlighted in the list. Note down accurately the waiting time required for their arrival. If you have an input inventory available to start production, assign a single day lead time to start manufacturing such items.
Determine the number of days and hours to manufacture a product or provide a service
Analyze and record the following: How much time your company requires to manufacture a batch of a particular product after receiving the essential inputs? Remember to include, in this period, weekends, holidays, unforeseen events, delays and maintenance sessions that may occur.
Another aspect to be considered: Are the machines required for production in perfect operating conditions? If repairs are required, the overall time may undergo changes.
If your company is a service provider, make sure that the employee in charge and the equipment are available; otherwise, include a lead time delay.
Add waiting times and variables
Add the time you must wait for the inputs of a product – or for the availability of a team, to plan the provision of a given service – to the period required to manufacture an item or finish a job.
This total time, that considers the waiting points both for the order and the end of production, is the required lead time to make an item available for delivery to the customer.
The benefits of efficient control
Most companies consider a real challenge controlling the time required for the whole cycle of buying a given product, manufacturing it and delivering it to the end customer.
Consumers are becoming less and less willing to wait for long. This factor imposes on companies the urgent need to invest in efficiency and productivity, in order to decrease production flows.
As we said, the high stock strategy isn’t effective for correct lead time calculation, in addition to being a potential problem for the company. Then, it’s necessary to analyze processes and examine how certain gaps or bottlenecks can be eliminated in the lead time of each product, in order to create time gains.
To achieve a significant reduction in lead time, an optimized and more efficient supply chain management is essential. In this case, technology is truly indispensable.
The use of e-procurement systems is a great choice, because they automate tasks such as product quotation and procurement closing activities, offering more control and visibility to managers.
Companies that don’t recognize the importance of a digital solution spend a lot of time with inefficient inventory management and bureaucratic manual processes, which often result in errors, bottlenecks and rework.
Learn how technology can improve your company’s process control and performance, while helping to decrease lead time.
The e-procurement software has an ERP (Enterprise Resource Planning) module, which is a system capable of integrating several departments in a company, to centralize information and facilitate communication among teams.
With ERP, managers can have a fuller view of the production chain and an overview of processes. In this way, it’s possible to find ways to reorganize operations, and identify faults and bottlenecks, in order to improve both performance and productivity and reduce lead time.
The use of software to manage the production chain contributes to the strategic planning of the company, solving problems such as:
- Non-integrated information
- Lack of planning for the input procurement
- Dependence on other areas to make decisions or carry out activities
- Communication gaps between the stock and procurement areas
- Incorrect or incomplete data
- Incorrect estimates for procurement
For the procurement process, e-procurement can control and automate:
- procurement orders
- price quotations
- procurement history analysis
- management of suppliers’ contacts and their history
- different levels of procurement approval
- scheduling of future purchases
Optimized supplier search
Selecting the best suppliers is crucial to the success of production, but it’s something that takes a lot of the time of employees. With an e-procurement system, it’s possible to improve this search, making selection more assertive and practical.
The procurement team can enter required parameters for suppliers in the system, which will only show compatible candidates, with the required characteristics, speeding up the search and reducing operational expenses.
At the platform, procurement managers can assess, in an uncomplicated way, aspects such as:
- product quality
- payment terms and modes
- rate of timely deliveries
The system can also automate negotiations and contracts, making the process more transparent and agile.
Another possibility is using the e-sourcing tool, also known as reverse auction. This system uses the Internet to find new suppliers, thus enabling the company to significantly expand its portfolio of contacts.
These e-sourcing solutions are extremely beneficial for companies that want to guarantee more attractive deals and get a wider variety of suppliers.
In the system, the users enter information on the materials they need, and the suppliers make their bids, competing with each other to close the deal. As in a reverse auction, the company can evaluate all offers and choose the one that offers best cost-effectiveness.
Manual reviews and bureaucratic tasks take time from the procurement team. With e-procurement, companies can automate processes and add value due to a more accurate control and less errors and repetitions.
With a few clicks, employees can generate reports and view both data and indications that show better options for all business operations.
With automated orders, the procurement area can follow the production schedule, favoring an ongoing and balanced activity flow, as the purchase of inputs is performed by the system and approvals are accelerated.
This makes all the difference in decreasing lead time, as there is no need to interrupt or delay the duty cycle due to lack of materials.
Simplified communication with suppliers
Having an excellent relationship with suppliers is essential to company competitiveness. After all, issues such as late delivery or unfavorable payment times are solved only when the supply sources are treated as business partners. This approach ensures a more beneficial negotiation for both parties.
Such ongoing communication can be streamlined and parameterized through an e-procurement system, which automates the delivery of e-mails and notifications to service providers.
Likewise, managers can track the performance of suppliers through reports, with the history of former purchases, and analyses with performance indicators. So the compliance of each supplier’s work can be checked and metrics can be monitored, to ensure a partnership that is always favorable for the company.
Internally, e-procurement contributes also to a better communication and less information mismatch, thus representing a great time saver.
Eventually, the procurement process gains much more agility and, with automation, involves fewer employees – which makes it more efficient and objective. The system will be then able manage a large number of supplier contacts more assertively, ensuring beneficial negotiations for the company.
Improved stock visibility
Monitoring the turnover of purchased products, and determining the correct repurchase time and the minimum quantities of each order are indispensable data, that must be constantly analyzed to ensure more strategic and effective future purchases, as well as to contribute to decrease lead time.
As we have seen, lead time has a close relationship to inventory levels, and the company should avoid both excess and lack of products, to ensure the best time for production and delivery of items.
The constant inventory monitoring and the aforementioned aspects are vital for procurement planning. Therefore, industry managers must know the number of available materials accurately and then make an inventory of such items.
For this task, an electronic system is the best option, as it ensures up-to-date, reliable and information aligned with other departments. Only in this way the company avoids the risk of negotiating a batch of products that, in fact, isn’t available in stock – which fully impairs the lead time of this operation.
All companies want to grow and strengthen their image in the market. However, there are many challenges and consumers are increasingly well-informed and demanding. As pressure for more quality and efficiency increases, the businesses can no longer waste time and financial resources with slow and flawed processes.
In this scenario, procurement lead time is a key performance indicator not only for end customer satisfaction, but also to point out the improvement needs in a company’s supply chain.
Thus, to be more successful and profitable, stay focused on this metric and invest in tools that will help your business to implement leaner, faster and more competent processes.