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The Important Role of Lead Time in Improving Company Operational Efficiency

Lead time management is a must to realize more efficient company operations. Every detail in the business process, from planning to product delivery, plays an important role in determining the success of the company.

Lead time or waiting time, refers to the time required from the start of the process to completion. Understanding and managing lead time effectively can have a significant impact on customer satisfaction, operational costs, and the company's competitiveness.

Companies that are able to optimize lead time will not only enjoy increased efficiency, but also be able to differentiate themselves from competitors. Therefore, it is important to understand the factors that influence lead time and what strategies can be applied to reduce it.

Read this article to understand about lead time, starting from the definition, function, calculation formula, to how to reduce it.

Definition of Lead Time

Lead time is the total time required from the time an order is made until the order is received by the customer. In the context of manufacturing, lead time includes the time required to obtain raw materials, production time, to product delivery time.

Meanwhile, in the context of services, lead time includes the time to complete a service from the time the customer makes a request until the service is completed.

Lead Time Function

Lead time plays a very important role in business management, especially in terms of operational planning and control. Here are some of the main functions of lead time that can help companies improve their operational efficiency and effectiveness:

Production Planning

Lead time plays a central role in production planning. By understanding lead time, production managers can schedule start and finish times for each stage of production more accurately.

This ensures that the production process runs smoothly without experiencing delays that can disrupt the workflow and cause inventory buildup.

Inventory Management

Lead time greatly affects inventory management. By knowing the right lead time, companies can better manage the timing of ordering raw materials or goods.

Effective inventory management helps reduce storage costs and improve the company's cash flow.

Quality Control

Adequate time in each stage of production allows for better quality control. By managing lead time, companies can ensure that each product or service meets quality standards before it reaches the customer.

Good quality control helps increase customer satisfaction and reduces costs due to defective products or returns.

Supply Chain Management

In the context of supply chain management, lead time is a tool for coordinating activities between various parts. This part includes raw material suppliers to the delivery of the final product to the customer.

By understanding and managing lead time, companies can ensure that each part of the supply chain is operating in sync.

Pricing

Lead time can also affect pricing strategy.

Products with faster lead times may have added value in the eyes of customers. Conversely, products with longer lead times may need to be priced more competitively to attract customers.

Lead Time Calculation Formula

Lead time can vary depending on the type of industry and the processes involved. Lead time is basically the total time it takes from placing an order to receiving it by the customer.

Here are some basic formulas for calculating lead time in various contexts:

Total Lead Time

Total lead time is the total time it takes to complete a process from start to finish. The general formula for calculating total lead time is:

Total Lead Time = Pre-processing Time + Processing Time + Post-processing Time

Pre-processing Time: The time required to prepare everything before starting the main process. This can include time for gathering information, planning, and preparing raw materials.
Processing Time: The time required to perform the main process, such as production or providing a service.
Post-processing Time: The time required after the main process is completed until the product or service is received by the customer, including packaging and shipping time.

Production Lead Time

In the context of manufacturing, production lead time includes all the time required to convert raw materials into finished products. The formula is:

Production Lead Time = Preparation Time + Production Process Time + Inspection Time + Packaging Time

Preparation Time: The time to set up and prepare equipment and raw materials before production begins.
Production Process Time: The time required to produce the goods.
Inspection Time: The time required to check and ensure the quality of the product.
Packaging Time: The time to package the finished product before shipping.

Procurement Lead Time

Procurement lead time is the duration required to order and receive raw materials or goods from suppliers. The formula is:

Procurement Lead Time = Order Processing Time + Shipping Time + Receiving Time

Order Processing Time: The time required to create and ship an order to a supplier.
Shipping Time: The time required for the supplier to ship the goods.
Receiving Time: The time required to receive, inspect, and store the goods received.

Shipping Lead Time

Shipping lead time is the duration required to ship finished products from a warehouse or production facility to a customer. The formula is:

Shipping Lead Time = Shipping Preparation Time + Transportation Time + Handling Time at Destination

Shipping Preparation Time: The time required to prepare the product for shipment, including packaging and scheduling shipments.
Transportation Time: The time required to ship the product from one location to another.
Handling Time at Destination: The time required to unload, inspect, and deliver the product to the customer.

Lead time is a critical element in supply chain management that can affect various aspects of a company's operations. Managing lead time effectively can provide significant benefits, including increased customer satisfaction, reduced operating costs, and increased competitiveness.

Lead time is just one of many management strategies for supply management. Learn more about it through the Supply Chain Management program from prasmul-eli.

With a two-day learning duration, this ISO 9001:2015 certified program has the following eight discussions: