How to Best Calculate Supply Chain Lead Times

Executive Summary

  • Lead times are critical to understanding supply chain planning systems.
  • We cover the supply lead time, customer lead time, supply lead time in inventory, and how to calculate lead times.

Introduction: What Makes Up the Lead Time?

This article will cover lead time in several dimensions. We will start off with the lead time definition and the lead time in the supply chain. You will learn all of the sub-lead times that constitute the overall lead time.

Lead Time in Supply Chain or Lead Time Supply Chain

The lead time in supply chain or lead time supply chain relates to lead times specific to supply chain are terms that describe lead times specific to supply chain management, as lead times are a general term that can apply to non-supply chain topics.

What Lead Time Means and a Lead Time Definition to Define Lead Time

The lead time definition is required to define lead time.

What lead time means is the time required to complete a supply chain process required to provide product to a customer ultimately. Common lead times include:

  • Supplier Lead Time or Supply Lead Time
  • Manufacturing Lead Time
  • Purchasing Lead Time
  • Shipping Lead Time

Customer Lead Time and Order Lead Time

Additionally, there are lead times from the demand side. This includes:

  • Customer Lead Time
  • Order Lead Time

Supply Lead Time in Inventory

Supply lead time in inventory is the portion of inventory that is correlated directly to the lead time. Lead time in inventory is made up of the inventory without variability.

Safety stock for the lead time in inventory would then be where the variability (always higher as only the variability above the baseline is what is calculated in safety stock) of the lead time is maintained.

Supply Lead Time Analysis

There is a lead time analysis that can be performed to determine the position in the lead time in inventory. This lead time analysis can divide the product database by lead time length. But this required performing a lead time calculation.

How to Calculate Lead Time, Lead Time Calculation and Build a Lead Time Calculator

How to calculate lead time or perform a lead time calculation means knowing how lead time is added together.

The various lead times connect in the following way:

For Manufactured Products

Replenishment Lead Time = Manufacturing Lead Time + Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time

For Procured Products

Replenishment Lead Time = Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time

Often what is desired is a total lead time, and this means having a lead time calculator that combines multiple component lead times as is shown above.

There is often discussion of expediting the various lead times, but in many cases, the only lead time that is reasonably capable of being expedited is the shipping lead time. The shipping lead time can only be accelerated at considerable expense (unless the product in question is of high value and low weight)

Conclusion

In this article, we define lead time, and we covered lead time analysis which requires lead time calculation. But to calculate lead time and develop an accurate lead time calculator and perform a lead time calculation means knowing the independent lead time components. These include things like the manufacturing lead time, procurement lead time, supply lead time, etc..

Lead time in supply chain or lead time supply chain declare lead time separately from other types of non-supply chain lead times.

References

Brightwork MRP & S&OP Explorer for Tuning

Tuning ERP and External Planning Systems with Brightwork Explorer

MRP and supply planning systems require tuning in order to get the most out of them. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

How to Plan Long Lead Time vs Short Lead Time Items

Executive Summary

  • Lead time has a definition and has different categories.
  • Important topics are lead time accuracy, effective lead time, static versus effective lead time and long lead time versus short lead time items.
  • This also gets into the topic of the feasibility of lead time reduction.

Introduction: Lead Time as a Foundational Concept

Lead times are always in the background but often overlooked in supply chain management. Even central concepts such as Lean or JIT are based upon (in part) a misunderstanding of lead times versus the replenishment trigger. You will learn the common lead time categories and our analysis of common (and commonly confusing) lead time topics.

What Are Lead Times?

The lead time a foundational concept of supply chain management. In this article, we will discuss various features of lead times including managing long lead time items and short lead time items and the feasibility of lead time reduction.

Lead times are the time between locations to within, or from a supply network.

Common lead times are:

  • Supplier or procurement lead time
  • Production lead time (still relevant for supply planning)
  • Customer lead times(the time from the supply network to the customer)
  • Transportation lead time

The term lead time often includes processing at the beginning or end of the main consuming component. For instance, a standard lead time definition will consist of the total supplier or customer lead times include the transportation lead time.

Production lead time similarly has processes such as staging, or quality inspection that are on either side of the time where production takes place.

Common Lead Time Categories

The following are common lead times that we will define.

  • Manufacturing Lead Time Definition
  • Procurement Lead Time Definition
  • Stock Transfer Lead Time Definition
  • Transportation Lead Time Definition
  • Goods Issue Lead Time Definition
  • Goods Receipt Lead Time Definition
  • Quality Inspection Lead Time Definition
  • Setup Lead Time Definition
  • Total Lead Time Definition

Manufacturing Lead Time Definition

The time from when the production order is created to when the finished good is available.

Procurement Lead Time Definition

The time from when the procurement order is placed to when it is received.

Stock Transfer Lead Time Definition

The time from when an item is issued from one internal facility to when it is received into another internal facility. Identical to the procurement lead-time, except it covers internal shipments rather than receiving shipments from external sources.

Transportation Lead Time Definition

The time from when an item is shipped to when it is received.

Goods Issue Lead Time Definition

The time from when an item is released to when it is available (normally for production or for shipment)

Goods Receipt Lead Time Definition

The time from when the item is received to when it becomes available as inventory.

Quality Inspection Lead Time Definition

The time from when an item is released to when it passes quality inspection.

Setup Lead Time Definition

A subcomponent of the overall manufacturing lead-time.

Total Lead Time Definition

Not a standardized term as there is no “total lead time” within a system. Rather it is a conceptual term.

Normally it is the entire time from when an order is placed until the item is delivered.

Notice that some these lead times are not referred to as “lead times.” For instance, one would ordinarily use the term “setup time” rather than “setup lead time.” However, the setup time is a lead-time as it is a time required to complete a task.

The Importance of Lead Time Accuracy

One of the major related issues with the lot size determination is data quality and accuracy of lead times. For a supply planning system to calculate accurate dates, the system must have lead times that reflect the reality of operations. The problem is that lead times often differ quite substantially from reality.

  • It should be noted that there is often a lead time variance from suppliers.
  • There can also often lead time variances in manufacturing as well as outbound transportation.

Interestingly this is not an issue that is discussed within companies. But it should be because it is a much wider problem than generally understood. And while there is a universal interest in forecast accuracy, lead time accuracy is often overlooked.

The Definition of Effective Lead Time

Effective lead-time is the lead-time required in the particular circumstance. Effective lead time is only modeled if the category of supply planning software call multi-echelon planning is used.

  • Different demand levels, lead to different circumstances and different needs to move to a higher echelon in the supply network.
  • The most important thing to consider is that while lead times between locations do not change (in the short term) effective lead times do change.

For software to be considered multi-echelon, it must have the ability to reflect the changes in effective lead time in its planning. This, combined with inventory optimization, which is a different set of mathematics. It is what allows the software to position inventory to the right location properly. To select the right quantity based upon the demand, the current stocking position, and the service level.

It can also be described graphically which can allow the reader to more intuitively understand what effective lead time is.

effecive-lead-time

Other Users of the Term Effective Lead Time

Another use of the term is when a company needs to determine if it has the raw materials/components/packaging material to make an order quantity. If a company can produce the sales order quantity from safety stock of all input materials, then the effective lead time is the production lead time.

If the order quantity exceeds this, the effective lead time must include the procurement lead time.

This is covered in more detail in this article.

How Can One Use the Concept of Effective Lead Time?

Interestingly, the term “effective lead time“ is unique to a special class of supply planning software, but is still useful to understand as a concept even if that category of software is not used.

Effective lead-time is the total lead-time required to deliver the product to its final destination. It is variable and dependent upon the stocking positions of higher echelons in the supply network. This is a conditional concept of lead time. A conditional concept of time for a lead time is quite foreign to the normal usage of the term lead time, which is static and hard-coded into a system.

When higher-level locations must be called upon to satisfy a demand, this lengthens the lead time.

In the excellent paper by Cohen, Agrawal, and Agrawal on dynamic asset deployment, this is described as follows.

“Similarly, investing in additional safety stock at a central depot reduces the effective lead-time for replenishment at the “child” locations connected to it. This lead-time reduction will, in turn, affect the stocking requirements at the child locations. Alternatively, such decisions are often constrained by the budgets allocated to the service organization. Consequently, if a particular asset is assigned to a specific location, it affects what can be assigned to other locations. Thus, the service levels that can be offered to customers at various locations are affected by these decisions, and are, therefore, interrelated; a high level of service to one customer may imply a lower level of service to another.” – Achieving Breakthrough Service Delivery Through Dynamic Asset Deployment Strategies, Cohen, Agrawal and Agrawal 2004 

What is Lead Time and Lead Time Meaning

Lead time meaning is the time required to complete a supply chain process required to provide product to a customer ultimately. Common lead times include:

  • Supplier Lead Time
  • Manufacturing Lead Time
  • Purchasing Lead Time
  • Shipping Lead Time

Additionally, there are lead times from the demand side. This includes:

  • Customer Lead Time
  • Order Lead Time

The Customer lead time and order lead time are considered to be synonyms.

Therefore when the question “what is lead time” the answer depends on what lead time is being discussed.

 Long Lead Time Items and Short Lead Time Items

A product location database can be segmented by the length of the lead time. What is considered a long versus short lead time can change depending on the company? For many US companies, the division between long lead time items and short lead time items is whether the product is sourced from overseas (often China) or domestically sourced. Of the products that are locally sourced cost more, but come along with short lead times.

Long lead time items must be planned considerably differently than short lead time items, and there is less margin for error. Long lead time items must carry more safety stock than short lead time items to make up for this.

How to Reduce Lead Time and The Feasibility of Lead Time Reduction

Often it is proposed that one can reduce lead times and therefore reduce the impact of lead times on supply chain planning. But really, what is the feasibility of lead time reduction? It turns out that there are normally few options to reduce lead times. The lead time that has the highest feasibility of lead time reduction is normally shipping lead time. However, shipping lead time is also normally expensive to reduce. And the supposed case studies that often are used to show the feasibility of lead time reduction tend to have little-published detail about them, and therefore are difficult to verify independently.

Conclusion

The lead time meaning is the time required to complete a supply chain process.

Lead times are one of the most important foundational components of supply chain planning. Many of the misunderstandings when it comes to business process or supply chain planning systems have their source in a faulty understanding of lead times. A good example of this is the notion that companies can simply switch to a make to order manufacturing environment.

  • Some things that many people do not think of as lead times are in fact lead times.
  • Lead times in most systems are static. But in some systems, they can be variable and dependent upon changing circumstances.

Lead times are any passing of time that can contribute to the time required to make something in the supply chain occur.

One of the most important lead time distinctions in companies is short lead time items versus long lead time items. Most companies treat the planning of short lead time items quite differently from long lead time items.

What is often not included in cost calculations for moving to lower cost items with long lead time items is the increased inventory costs which as well as planning and update costs which are incurred by accepting longer lead times. Finally, many of the

Finally, many of the case studies presented that show a reduced lead time example don’t stand up to scrutiny or don’t provide sufficient detail to verify if in fact lead times were reduced, and secondly, what costs were incurred to reduce those lead times.

Remote Supply Planning Consulting

  • Want Help with Supply Planning?

    It is difficult for most companies to make improvements in supply planning without outside advice. And it is close to impossible to get knowledgeable supply planning advice from large consulting companies. We offer remote unbiased multi-dimension supply planning support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

Brightwork MRP & S&OP Explorer for Tuning

Tuning ERP and External Planning Systems with Brightwork Explorer

MRP and supply planning systems require tuning in order to get the most out of them. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

References

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

The Problem Using a Monthly Forecast Percent Error

Executive Summary

  • The percent forecast error is commonly calculated in a problematic way.
  • We cover the proper forecast error measurement in the time dimension.
  • There is a general mismatch of this forecast percentage error calculation with reality.
  • This is the problem with using a month as the forecast measurement interval.

Introduction to Forecast Error

Not much thought is given to this topic, yet all forecast errors reported by companies are questionable because of an important consideration. That is the interval over which the forecast error is calculated. You will learn about how forecast error is managed.

How the Percent Error is Calculated and the Mismatch with Lead Times

If we review how the forecast error is commonly calculated by supply chain companies, we find the following.

  • Typically forecast error is calculated on a month per month basis. That is the forecast is divided by the actual demand for a product location (or for whatever level of aggregation is being measured). In a dynamic safety stock calculation, the error is calculated over the lead-time. If the lead-time for the product is two months in length, and the month to month MAPE is 50 percent error, if 50 percent error is used, while the two-month MAPE is 25 percent error, the calculated safety stock will be too high.
  • If on the other hand the lead-time is two weeks, and the 50% MAPE is used, the safety stock will be too small.

The Proper Forecast Error Measurement in the Time Dimension

The only proper forecast error measurement is over the lead time. This can be seen by taking an example. If you have a one-week lead-time, then you can reorder every week. Therefore you can reorder the following week. On the other hand, if the lead-time is three months, you cannot adjust the forecast during the three month period after the order is placed.

Therefore under the standard monthly forecasting error measurement interval, the forecast error will be overestimated for the product with the weekly lead time and underestimated for the product with the three month lead time.

The Problems with Using a Month as the Forecast Measurement Interval

A month is used in many cases to measure forecast error, and I do it myself on projects because if one has an overall database of products, it is too much work to adjust the forecast error per lead time per product as each product has a different lead-time.

Now I have never once seen this topic raised on projects. But it is undeniably true. Therefore, due to the complexity of measuring forecast error in this way, the standard and inaccurate interval of a month continue to be used for prediction error.

Remote Supply Planning Consulting

  • Want Help with Supply Planning?

    It is difficult for most companies to make improvements in supply planning without outside advice. And it is close to impossible to get knowledgeable supply planning advice from large consulting companies. We offer remote unbiased multi-dimension supply planning support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

Brightwork Forecast Explorer for Monetized Error Calculation

Improving Your Forecast Error Management

How Functional is the forecast error measurement in your company? Does it help you focus on what products to improve the forecast? What if the forecast accuracy can be improved, by the product is an inexpensive item? We take a new approach in forecast error management. The Brightwork Explorer calculates no MAPE, but instead a monetized forecast error improvement from one forecast to another. We calculate that value for every product location combination and they can be any two forecasts you feed the system:

  • The first forecast may be the constant or the naive forecast.
  • The first forecast can be statistical forecast and the second the statistical + judgment forecast.

It’s up to you.

The Brightwork Forecast Explorer is free to use in the beginning. See by clicking the image below:

References

I cover this topic in depth in the following book.

Forecasting Software Book

 

FORECASTING

Supply Chain Forecasting Software

Providing A Better Understanding of Forecasting Software

This book explains the critical aspects of supply chain forecasting. The book is designed to allow the reader to get more out of their current forecasting system, as well as explain some of the best functionality in forecasting, which may not be resident in the reader’s current system, but how they can be accessed at low-cost.

The book breaks down what is often taught as a complex subject into simple terms and provides information that can be immediately put to use by practitioners. One of the only books to have a variety of supply chain forecasting vendors showcased.

Getting the Leading Edge

The book also provides the reader with a look into the forefront of forecasting. Several concepts that are covered, while currently available in forecasting software, have yet to be widely implemented or even written about. The book moves smoothly between ideas to screen shots and descriptions of how the filters are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: Where Forecasting Fits Within the Supply Chain Planning Footprint
  • Chapter 3: Statistical Forecasting Explained
  • Chapter 4: Why Attributes-based Forecasting is the Future of Statistical Forecasting
  • Chapter 5: The Statistical Forecasting Data Layer
  • Chapter 6: Removing Demand History and Outliers
  • Chapter 7: Consensus-based Forecasting Explained
  • Chapter 8: Collaborative Forecasting Explained
  • Chapter 9: Bias Removal
  • Chapter 10: Effective Forecast Error Management
  • Chapter 11: Lifecycle Planning
  • Chapter 12: Forecastable Versus Unforecastable Products
  • Chapter 13: Why Companies Select the Wrong Forecasting Software
  • Chapter 14: Conclusion
  • Appendix A:
  • Appendix B: Forecast Locking
  • Appendix C: The Lewandowski Algorithm.