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Lead Time Reduction: Why It’s Important and How to Do It Right

Lead time reduction can help grow your company’s bottom line.

Lead time reduction can help grow your company’s bottom line.

Are you tired of sitting on your hands, waiting for your products to arrive?

You may need to implement a few lead time reduction strategies.

Lead times vary from industry to industry, but they should still be consistent and relatively short.

If you’re not receiving shipments as quickly as you should, you won’t be able to serve your customers as well as you could – and you’ll lose revenue in the process.

To help you improve your customer service and increase your revenue, we’ll show you why lead time reduction is so important, and give you a few tips you can implement by the end of this post.

Before we get to that, let’s make sure we’re on the same page by defining lead time.

What is Lead Time?

Lead time is the time it takes to process an order and receive the shipment of your products. It’s a critical tool for calculating safety stock inventory, and for applying a correct reorder point formula.

It’s both dependent on your process for taking and placing orders – an Excel inventory management system vs a cloud-based inventory management system – along with how efficient your supplier can prepare and ship your stock.

For example, if you placed an order today, and receive a shipment in 8 days, your lead time for that specific order with that specific supplier is 8 days.

Your lead time will most likely vary for each order, but if you want to know your average lead time, you can use this formula:

The total number of lead times divided by the total number of orders placed.

i.e., if you order stock once a month for 6 months, your total number of orders placed would be 6.

Following this example, let’s assume these were your lead times:

January8 Days
February11 Days
March9 Days
April6 Days
May7 Days
June5 Days

Add up all the lead times (8+11+9+6+7+5) = 46.

Now just use our formula:

The total number of lead times (46) divided by the total number of orders placed (6) = 7.67

7.67 is your average lead time for this example.

Relative to your industry, the faster your lead time, the more efficient your entire supply chain will be – which is just one of a handful of benefits of lead time reduction.

Lead Time Reduction Benefits

The major benefits of reducing lead times are reduced carrying costs, streamlined operations, and improved productivity.

But the list doesn’t end there.

Here are a few more specific benefits of lead time reduction:

  • Flexibility during rapid shifts in the market
  • The ability to outpace your competitors with faster, more efficient output
  • Quicker replenishment of stock to avoid stockouts, lost sales, and lost customers
  • Meeting deadlines consistently and easily
  • Increases in cash flow because of increased order fulfillment

This isn’t an exhaustive list, but gives you an idea of what you stand to gain if you can make even marginal reductions in your lead time – which we’ll cover in the next section.

Lead Time Reduction Strategies

If you want to reduce your lead time, here are a few strategies to get you started.

Create a Lead Time Contract With Every Supplier

You probably have a contract with your current supplier, but have you stipulated your terms and expectations on lead time?

Probably not, and you should.

Any supplier can make bold claims about their lead times, but many won’t live up to the hype.

When you ask your supplier to legally agree to predefined lead times, they may hesitate and become uneasy.

That’s good.

It means they’ll be more realistic in what they can offer you, and will be more likely to push themselves to maintain the agreed upon lead times.

Before this discussion takes place, you should already know your ideal lead time.

Once you’ve got that figured out, here’s what should be in your contract:

  • Lead times for each specific order/stock
  • The penalty for delayed or late shipments
  • The penalty for damaged goods during transportation
  • A notice in advance of a shortage of stock, discontinuations, or price changes

Order Inventory More Often

Many businesses place large bulk orders once every few weeks. This is predictable, and leaves you with plenty of stock in your warehouse.

However, that stock will quickly increase your carrying costs, and if it’s not sold, will become obsolete and will have to be dramatically discounted or discarded – and you’ll be stuck eating that cost.

Ordering smaller amounts of inventory more often – based on accurate sales data and realistic forecasts – helps you increase your rate of inventory turnover, lowering the overall cost of carrying inventory.

This method is best used by companies trying to implement a just-in-time inventory management solution, but it can also be used by companies who simply don’t want to order more than they need.

Share Sales Data With Your Supplier

If you keep detailed records of your sales data, and use these reports to order stock from your supplier, you can share it with them to increase your collaboration.

If they can see your sales data, they can anticipate an incoming order. They may even have your stock ready to be shipped the moment you send your purchase order if your orders are fairly consistent.

Sharing the burden of order quantity gives you the benefit of lower lead times, and gives your supplier the benefit of knowing how to best serve you alongside their other customers.

Automate Your Inventory Management

Forecasting demand, generating sales reports, and calculating lead times are much easier to accomplish when you aren’t wasting your time manually entering data and writing purchase orders.

Inventory management software can automate your stocktaking process, optimize your supply chain management, and help you balance your working capital.

Keeping track of purchase orders, stock levels, sales data, and carrying costs is simple and straightforward.

If you want to reduce lead times and streamline your operations, then we have the inventory management solution you need.

Lead Time Reduction Through Automated Inventory Management

DEAR’s cloud-based inventory management software will automate almost every manual process you have to perform, and will help you collaborate and communicate with your supplier to reduce lead times and improve product quality. Plus, you’ll get all the other benefits of an intuitive, easy-to-use, easy-to-setup interface that centralizes all your data into a single inventory management hub.

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