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.

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?

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

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.

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.

What is Lead Time and the 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.

Many companies make very high profits by importing products made in low wage countries. These products mostly come by ship and have long lead times. While many Lean consultants have preached about lowering lead times, this outsourced manufacturing to these low wage countries has caused lead times to lengthen quite significantly. However, the profits are so high on these items from a financial perspective, it makes sense to accept the long lead times. 

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.

How to Calculate Lead Times

To properly understand lead times, it is beneficial to view the subcomponents of lead times to determine what makes up the overall lead time. We covered this topic in the article How to Best Calculate Lead Times.

The Definition of Effective Lead Time

Up until this point, we have covered lead times as entered in systems, or static lead times. However, there is another type of lead time that is important to understand that changes depending upon the specific circumstance of demand and applied to the supply network. This is the concept of effective lead time.

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 

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.

Lead times which change depending upon the circumstance of demand versus the inventory or planned inventory in the supply network are called effective lead times. The only supply planning method that calculates effective lead times is classified as inventory optimization and multiechelon software.

Search Our Other Lead Time Content

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