Reducing Lead Time in Logistics – Why It Is Important?

12 July 2022

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​Teleportation, one of the favourite subjects of science fiction is still a hypothesis. Until it becomes a reality and logisticians are rendered useless, it takes time and planning to move materials from one location to another.

Normally, goods are moved between a raw materials storage to the manufacturer’s processing facility, from the manufacturer’s warehouse to a customer, or from the customer back to the supplier, known as reverse logistics.

The time taken for goods or services to move from their origin to a destination is called lead time. Logistics lead times are critical to any business activity – be it the delivery of goods or services. It is one of the most important factors of inventory control.

Typically, in goods warehousing and logistics, it is the elapsed time between the placement of a purchase order by a customer and receipt of goods according to the purchase order, at the customer’s warehouse or the preferred location. It may also be viewed as the total time taken for the customer’s order to be fulfilled by the supplier.

It is not just the movement of materials that are affected by lead times. Intangible services have lead times too. It could be from the date of agreement to deliver a service to a customer, to when it is finally delivered to the customer for his use – ready for implementation at his preferred location.

The time or gap between the two, which is the service lead time, is the time taken to process and deliver the services according to what is agreed between the customer and the supplier.

In short, lead time is the fulfilment time. Here let us take a look at lead times related to goods or materials.

Lead time is critical to all businesses for planning their activities and for ensuring customer satisfaction. Most companies aim to achieve shorter lead times to streamline their operations.

In the event of an out-of-stock situation, this can be helpful as goods are received within a short period and an extended stock-out is avoided.

Shorter lead times mean that a large stock holding can be avoided by the business as stocks meant for processing or resale are received within a short period. Lesser volumes of stocks held mean less capital tied up. This ‘extra cash’ that becomes available to the organization can be used for other purposes within the business.

Lesser stocks mean fewer space requirements as well as labour, that would otherwise be required to handle larger quantities of stocks.

Generally, organizations that measure lead time break it down into the following components:

Purchase order processing time

This is the time it takes for the customer to generate a purchase order and dispatch it to the supplier, either electronically or by mail.

Goods processing time

Time taken by the supplier to process the customer’s purchase order and keep the goods ready for pickup and dispatch by a freight forwarder or by the supplier’s logistics section is called the goods processing time.

Transit time – including the period of pre-transit storage, inspection, etc.

It is the time taken for the cargo to move from point A to point B. It could be the supplier warehouse to the customer’s premises. It includes time on pre-transit storage, any inspections carried out by the relevant authorities, and the sailing time by a freight carrier.

Some organizations take only the sailing time as the transit time.

Clearance time

This is the time taken by the appointed clearing agent to get the cargo cleared by the customs at the destination port, after inspection and payment of all customs duties, taxes, and surcharges.

Transportation & Delivery

Following payment of all dues and customs clearance, the goods are moved from the port premises to the customer’s warehouse or the preferred location.

Are Lead Times Important?

Calculation of accurate lead times is crucial for processing the purchase orders of a business and in maintaining an optimum stock position. Outdated or wrong lead times can result in stock shortages or accumulation of stocks that are not needed at that time, also referred to as overstock.

The health of an organization may be measured, based on these two factors – stock shortages and overstocks. Both these situations are undesirable as organizations aim towards lean, mean operations.

Calculation of lead times and a study of its effect on inventory management is important for all businesses to meet the satisfaction of their customers. Lead time can be one of the important Key Performance Indicators (KPI) for such companies.

Calculation of Lead Time

Typically, lead time is calculated as the total number of days it takes to fulfil a purchase order. This includes placement of a purchase order with a supplier, dispatch of goods by the supplier, arrival and customs clearance of the goods at the destination port, and final delivery to the customer’s warehouse or the preferred location.

In some organizations lead time is referred to as the Supplier Purchase Order Turn-around (SPOT). Maximum and minimum lead times are considered while preparing forecasts and placing orders. A simple method to calculate lead time for placing purchase orders is to take the average lead time from recent, historic data.

Reducing Lead Times

Several factors can be looked into for reducing logistics lead times. Some of them are as follows:

Formulas Used in Purchase Order Calculation

Any abnormal variations between the calculated lead time and the actual lead time should be investigated and steps are taken to correct them immediately. Are formulas used in the calculation of purchase orders correct? A forecasting and purchase ordering system with wrongly set parameters can create havoc with the order quantities as well as their placement intervals and arrivals.

Any other glitches in the system should be ironed out prior to placing purchase orders. The parameter settings of a stock management system must be checked from time to time for their accuracy by the stock management team and the necessary changes made immediately.

Purchase Order Receipt by Supplier

The purchase orders generated may not be getting transmitted to the supplier on time. These days, most purchase orders are system-generated and do not require a confirmation signature.

However, those orders that require a signature could be waiting to be signed by the relevant authority in the company? Delays in purchase order transmission can lead to extended lead times.

Proximity to Suppliers

Dispatch of goods or raw materials from far-flung suppliers often gets delayed. Ineffective communication and cultural distance can get in the way between such suppliers and their customers – especially when they are located on different continents. In such cases, it would be better to opt for nearby, reliable suppliers who can deliver goods with a short lead time.

Change in Freight Forwarder or Shipping Line Used

A new freight forwarder or shipping line may not be familiar with the customs and formalities of the customer. In such cases, it is suggested to communicate with them and make matters clear or in other cases, use local service providers who are familiar with such matters.

A customer may also consider changing shipping methods when it is found that the current method of shipping is ineffective.

Consolidation of Orders

A purchase order may not be a full container load (FCL). Instead of waiting to increase the purchase order quantity and fill a container, consolidation or groupage can be considered. Consolidation or groupage is the shipping of several Less-than Container Load (LCL) consignments by a single container to form an FCL. Each LCL shipment will be under a separate Bill of Lading (BL).

Effective Communication

Above all, an effective and efficient communication system between the parties involved in shipping – the customer, supplier, and the shipper or freight forwarder is of utmost importance. The concerned internal departments of these parties should also be part of this communication.

The after-effects of a delay in delivery of a consignment or any anticipated delays can often be reduced or even negated if it is communicated on time between the parties. Various track and trace software is used these days to follow shipments and improve communication between the concerned parties.

Reduction of human involvement in the calculation of purchase order quantities and placement of purchase orders is another solution to avoiding errors and delays.

Reduced lead times mean less inventory on hand and therefore less input to manage these materials. As a result of holding less inventory, the exposure to risk and wastage is also reduced drastically. However, if it is not managed properly, it can result in stock outage or overstock.