Lead Time continues to be one of the most requested topics in our discussion groups, customer surveys, and blog research interviews. There are several reasons that Lead Time is important: a significant portion of your inventory dollars are invested in lead time, it’s a critical component to Just in Time (JIT) inventory replenishment, and last, many consulting and logistics software companies tout how Lead Time is the Holy Grail to achieving inventory optimization. Don’t believe the last one, its smoke and mirrors.
Lead Time process improvements provided one retailer a $1 Million dollar gross profit gain from lost sales reductions!
The Truth and Lies about Lead Time
What is Lead Time? A KPI measure of performance, a supply chain concept, or a step in the process of inventory replenishment? Actually, lead time can be all of these at some point in your business.
Today starts a 3 part series all about lead time:
- What is Lead Time
- How lead time affects your supply chain performance.
- Steps to improve your Lead Time visibility and Lead Time Process.
To keep everyone on the same page, let’s establish some definitions of terms and how we will use them in our Lead Time series of blogs. Remember you can subscribe to our blog on this page with just an email and get each blog emailed direct.
What to include when measuring ‘Lead Time Days’
Days that need to be included in Lead Time start at the date of PO creation and conclude when the product is available for use, shipment, or sale. When a Purchase Order (PO) or fulfillment order is created, there are several layers or stops that may be included in the Lead Time.
Several Stops or layers of Lead Time might include:
Supplier build time, transport time on ocean, time for customs, time for additional transport, time for warehouse transfers (an example – time to receipt and transfer from a master DC and sub-DC), date/time for receipt, time for goods prep, days to wait until ship date for final destination (ex: If you ship once a week to a store,and then you must consider the days goods are available to ship out of the DC that must wait for the next available day of week ship schedule).
Multi-Echelon can be layers of Lead Time Confusion
Often, the additional layers or warehouse processing time is not included in Lead Time considerations; this can lead to issues. For example, if you receipt goods at a master DC but then must transfer the goods to a sub-DC for their shipment to consumer or store; this time must be included in the lead time days calculation. If these additional days are not accounted for, you have the potential to run out of stock and not meet service.
For our purpose and to keep things brief let’s start by summing all the layers and stops to get a total number of lead time days. Often, the total (sum) Lead Time Days number is a part of the supplier agreement and called ‘supplier lead time quoted’. When problems occur in the lead time, you can break down the problem lead time into layers to identify where the real issues are occurring.
HINT: Avoid the complexity in your reviews. Start tracking the number of days between PO creation and PO receipt. Don’t initially include the extra days between DC receipt date and date goods are available to use, ship or sell. Test your assumptions between PO create and PO receipt date. The majority of out of stocks can be found at the intersection of these two dates when compared to expectations. Remember that often the issue may not be the supplier but poor communication: the lack of direction on your purchase order or the performance of your logistics provider.
What is Supplier Lead Time Quoted (Vendor Lead Time)?
Supplier Lead Time Quoted is a number of days the supplier and you agree to (lead time quoted) that covers the number of days from purchase order placement until the goods are available to be shipped or sold. This is normally part of your supplier agreement; the supplier has a heavy influence on this day count due to their production time, distance for goods to travel, logistics and minimum components.
Lead Time process Improvements gave one retailer a $1M Gross Profit Gain
Measuring Lead Time Days against Supplier Lead Time Quoted will have a significant impact to your business. One retailer identified $1million in gross margin dollars from lost sales due to the wrong lead times being used. Start with a simple report that compares PO create date, PO Receipt date and PO Request date. Where there are Lead Time variance issues, your next step is identify and fix the process that fails to perform.
Lead Time Visibility and Lead Time Performance Tracking are Profitable
Manufacturers, Wholesalers and Retailers all have Lead Time Days to consider. The layers and stops along the supply chain can be different;but the need for visibility, and KPI performance measures in this complex array of events is critical. Visibility needs to be accessible to all related parties: suppliers, logistics, buyers/ merchants and support staffs.
Subscribe to our Blog with your email address and get the next two articles in your email automatically. Join us as we continue to explore opportunities to grow profits and tighten the links in your chain. Our next blog discusses how lead time affects your fill rates, bottom line, and how you can improve your Lead Time processes.
Are you ready to ‘Tighten the Links in Your Supply Chain?™’
Stop accepting costly lead times, lack of lead time visibility and no real connections between out-of-stock and Lead Time performance. Contact us for a free review of your current lead time and out-of-stock issues. We have the experience and tools to help you improve your business. Also, request a demo to learn how our software can reduce out-of-stocks from poor lead time performace and increase sales. We install in 30 days at a fraction of the cost of legacy systems.
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