# How to Best Calculate Supply Chain Lead Times

## Executive Summary

• We cover how to calculate overall supply lead time, customer lead time, supply lead time in inventory.
• This describes how to calculate lead times and overall lead time calculation.

## Introduction: What Makes Up the Lead Time?

Lead times are one of the major timing elements within the overall subject of supply chain planning. This article will cover lead time in several dimensions and focus on lead time calculation.

The lead time in supply chain or lead-time supply chain relates to lead times specific to supply chain planning and is what when combined to make up the time from when the order is placed until the time the order arrives.

• These are all terms that describe lead times specific to supply chain management.
• Lead times are, of course, also a general term that can apply to non-supply chain topics. For example, a product plan results in calculating a series of lead times for completing various stages of a project, as well as the overall product duration.

Lead times are normally not shown graphically in supply planning systems. However, if they were — they would look something like a project plan. That is, lead times are a sequence of dependent durations with relationships. Manufacturing can’t commence upon material until the material arrives, and the material can’t arrive, until the time has passed from the order, etc..

## Auto Lead Time Calculation of Interdependent Lead Times in Supply Planning Systems

In a supply planning system, all of these dependencies are calculated every time, and a sales order is created.

• The system knows that if a sales order is desired for say August 20th.
• The procurement order for input item ABC must be made on May 12th
• The overall production order must commence on July 5th, etc..

The total lead time is the time required to complete a supply chain process needed to provide the product to a customer. The overall lead time is made up of the following sub-lead times from the supply side:

This includes:

These are more hypothetical lead times with it comes to supply planning and are measurements of lead time that occur before the order is placed.

## How is The Supply Lead Time Incorporated into Inventory Management and Safety Stock

• Supply lead time inventory is made up of the portion of the stock that is held without any variability.
• Safety stock is made up of inventory that accounts for variability or uncertainty on both the demand and supply side. And with a dynamic safety stock formula, the service level is another category of the safety stock.
• Safety stock for the lead time in inventory would then be where the variability (which is always higher as only the variability above the baseline is what is calculated in safety stock) of the lead time is maintained.

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

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

The various lead times connect in the following way:

## For Manufactured Products

For Procured Products

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

Often what is desired to be calculated is a total lead time. This means having a lead time calculator that combines multiple component lead times that are shown above.

## How Effective is Putting Effort into Reducing the Lead Times?

There is often discussion of expediting the various lead times. Process improvement or Six Sigma or Lean consultants often propose simply reducing lead times.

The proposal is often stated as…

“If we can reduce our lead times, by ABC% we could reduce our inventory by ZYX%.”

The consultant will often present the information as if many companies have had success in reducing lead times. Lean consultants tend to have a philosophical problem with any constraints that exist in the supply chain. Their training is designed around altering the limitations rather than adjusting to these realities. These consultants will propose working with suppliers or using various forms of expediting.

The problem with this is that it tends to provide a false impression of the actual constraints. And secondly, it tends to be proposed by people with a background in areas other than the domain of supplier management and shipping. That is, the lead times that exist are typically there for a reason.

Lead times reduction projects ten to take a lot of time, and most of them don’t work out. In the interim, the supply planning systems need to reflect the lead times as they are.

## Applying the Wal-Mart Strategy with Suppliers?

Wal Mart is often pointed to as a company that can get suppliers to make significant adjustments for them. However, there is a distinct and serious problem in projecting what Wal-Mart has done and can do with suppliers to other companies.

• Unless the company being discussed is a substantial percentage of the supplier’s business, it is unlikely the supplier is interested in adjusting its operations to suit one supplier. The lead time is configured around the cost that is negotiated. As soon as shorter lead time is requested, this is a change to the terms of that arrangement — and the buyer needs to expect to pay more for the same items. Lean consultants tend to make it sound as if suppliers will simply change the terms of the transaction without any request for extra compensation. Suppliers that won’t conform to the expectations of the Lean consultant are often categories as “difficult.”
• When the proposal is made by a Lean consultant, it typically is just one of the areas that he is trying to pitch to justify his cost billing the account.
• Suppliers are ordinarily already trying to get products to their customers as quickly as is financially feasible. Suppliers know that customers are including lead times or “responsiveness” into their evaluation of who they will select as a supplier.
• The Lean consultant may propose switching to different suppliers with shorter lead times. However, this usually is only done at a higher cost.

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). A second area that is proposed is that the current manufacturing lead times can be reduced.

Again, in many cases, it is possible, but only at considerable expense. This often means installing more machinery or adding more machine operators. Overall, manufacturing capacity is frequently reduced (and therefore lead times lengthened) through the process of product proliferation. Thus manufacturing capacity could be increased and lead times reduced by cutting down on changeovers — but this is typically not acceptable to marketing.

## Realizing The Reality of Lead Times

It is rare for companies to substantially reduce their lead times. That is, lead times tend to be far more fixed than is often promoted by various process improvement consultants. Therefore, rather than being distracted by concepts around reducing lead times, the most critical function is to simply reflect the lead times in the supply planning system. Any inaccuracy of the lead times impacts the accuracy of the supply plan the same way that a forecast error would.

## The Typical Accuracy of Lead Times Residing in Supply Planning Systems

Lead times usually have a level of inaccuracy, and companies typically put very little effort into updating their lead times. That is, once a lead time is entered into the system, it is likely to stay there for many years. Companies will often talk about their lead time inaccuracies but usually will not make it a priority to modify or update the lead times. If a company reduces lead time inaccuracy by say 10%, this has the same impact on the accuracy of the supply plan as a 10% reduction in forecast accuracy.

Finally, with the use of so many suppliers in so many industries that are driven by cost considerations, it means that the lead times have lengthened in the developed countries. Many input products for at least some industries come from China. Companies could have sourced those products from the US, but they preferred the higher margins of Chinese manufacturing.

## A False Belief of Frequently Updating the Planning Process for Responsive Supply Chain

In many companies, a mantra has developed that it was important to be able to reflect the most recent updates to the planning process. What this results in are frequently last minute updates to the forecast and a very short or non-existent frozen period. This is promoted as forward thinking when, in fact, it is quite regressive.

## The History of Supply Chain Planning

Planning has always existed in one form or another. However, it developed in conjunction with the rise of computers. There is no doubt in my mind that grain warehouse managers in ancient cultures performed some planning for managing the creation and inventory management of anything from grain stores to stones at a quarry. There is no doubt that planning took on enhanced capability with computers providing the ability to manage large amounts of data necessary to perform detailed planning.

However, while many companies purchased supply chain planning software, far fewer internalized the concepts and discipline of planning. For this reason, the vast majority of supply chains are reactively managed. And many people in high levels of companies such as Vice Presidents and Directors of Supply Chain do not appreciate or have even studied supply chain planning at any level of detail. For many of them, the planning systems are merely things to be manipulated to meet their short-term goals.

## Responsive Supply Chain Concepts

Many think that the more they interfere with the system and the more responsive they make the system, the better the results will be. Thus, few organizations make much progress with their supply chains from year to year, because they lack the knowledge and discipline among their leadership ranks of how to effectively manage the systems they have purchased to achieve the organizations’ supply chain objectives.

## The Issue of Lead Times and Responsive Supply Chain

The problem with this idea is that it can be easily contradicted by looking at lead times. That is, changes to forecast cannot realistically be expected to be managed efficiently if they come in within total manufacturing or procurement lead times. However, the response one gets is that materials can be expedited.

What would seem desirable is for companies to build in flexible lead time capabilities into their products so that different lead times could have different costs associated so that the model could pick the best most appropriate lead time.

The problem with this is most companies don’t know the actual costs of expediting products. Secondly, they have a big enough problem managing the master data of the lead times that they already maintain.

This is a good explanation of lead times. Lokad describes a very high effort approach to improving lead-time estimation. There are very few companies that are willing to put in this amount of work to get high degrees of lead time accuracy.

## Conclusion

However, to calculate lead time and develop an accurate lead time calculator and perform 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..

There are several topics around lead time accuracy and the opportunity to reduce lead times. However, the role in supply planning with lead times is to try to reflect the actual lead times within the supply planning system.

The concept of planning systems with regards to lead times is simple. The lead times entered are to be the company’s best guess as to the time required to perform different tasks. Planning systems are deterministic in that they produce a plan based on these lead times, and they need a sufficient lead time to do their job. If you interfere with their operation by forcing a broken and undisciplined forecast process onto the supply and production planning system, negative consequences will occur.

## Using the Diagram

Hover over each bullet or plus sign to see more explanation. To move to a different bullet point, just “hover off” and then hover over the new bullet.

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## Replenishment Triggers: Setting Systems for Make to Stock, Make to Order & Assemble to Order

### 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