This article was originally published on www.sourcingallies.com
In manufacturing, lead time is the time it takes for a production process — from initiation to delivery — to be completed. This includes sourcing the raw materials, transporting them to the factory, manufacturing, and shipping, right up until the buyer receives the goods. Reducing lead time by streamlining operations greatly increases supply chain efficiency, which leads to cost savings.
Lead time can vary for different products. For instance, if you manufacture a generic product that does not need any special raw materials to be sourced or tooling to be done, it will be manufactured and delivered in less time than, say, a prototype that requires tooling such as injection molds that may also need to be tweaked later. Similarly, any outsourced manufacturing — such as in a factory in China — will take longer to be delivered than if you manufacture the product in your home country. Lead time for outsourced manufacturing also varies depending on how close your factory is to a port.
Whatever your product or component, the lead time should be consistent and as short as possible. Longer lead times may lead to stock-outs, which may result in your business losing customers and revenue. Shorter lead times, on the other hand, lead to an increase in output and corresponding revenue. At the same time, too short a lead time (a plausible but rare occurrence) may cause inventory to pile up and also tie up your funds, which is not a desirable situation either.
My fear of the factory quoting very short lead times is that they often just throw those times out in order to get the business or appease the customer. Quite often they will be unrealistic, or in order to hit them, the factory may cut corners — for instance, make the parts but not inspect them properly or make them in a way that is quicker but not necessarily better for that component. That means they may substitute the “correct” process for one that’s quicker and maybe cheaper but results in a less than ideal part.
While production delays can cause heartburn for buyers because of the loss of revenue, pressure on suppliers to send orders speedily can also affect quality, which will hurt your business in the long run. This is why businesses should aim for optimal lead time tailored for their particular requirements. Some companies do this using inventory management software.
But what can cause delays in production? The reasons are varied and can be divided into preventable and non-preventable delays. Any efficient business will factor in delays into their delivery expectations.
Preventable and non-preventable delays
Preventable delays include incorrect HS code labels on shipments, which can lead to products being pulled aside for customs inspections. In China, one preventable delay is Chinese New Year festivities, during which factories across the country shut for at least a week as workers head to their hometowns to celebrate the festival. Experienced importers usually do not plan any major orders around this lunar new year celebration, which usually falls in February
Non-preventable delays include sudden port strikes, shortages of raw materials, severe weather or natural disasters that can affect the transportation of goods.
Rule Number One of calculating lead time is: Be realistic, not optimistic.
How to protect yourself from delays
It is natural for manufacturers who want your business to promise to deliver your goods within your preferred lead time. But you will protect yourself from costly delays in delivery if you make your desired lead time clear to your supplier from the very beginning, and also incorporate it into your manufacturing contract. This contract, which will legally bind your supplier to deliver the goods to you by the mutually agreed upon time frame, could also have a clause that defines penalties for delayed or late shipments. When suppliers know that lead time will be incorporated into contracts, they are more likely to quote a realistic lead time to you, which will help you plan your inventory better.
Inserting the lead time into the manufacturing agreement will also ensure that the supplier doesn’t push your order down on its list of priorities just because a bigger or more valuable customer places an order that is needed in a hurry.
It is common to see delays in lead time for various reasons. This is why, while drafting quotes for our clients, we at Sourcing Allies account for them by adding a few days to the lead time we present to our clients. This ensures any delays will not play havoc with their internal planning regarding stocks. We reduce this time buffer if we have worked with the supplier before and know they are reliable. If the product needs tooling, we might add an extra 10 days onto its optimal lead time.
In my opinion, if it is particularly critical that the consignment reaches you on time (perhaps it is needed for an event or exhibition and will be useless if it doesn’t make it by then), you could also specify in the agreement the date by when the consignment must reach the port. This is because if consignments are late at the port even by just a day, the overall delay could stretch to a week because once a consignment misses sailing day, your shipment will not move until the next sailing day, which is usually a week away.
Sometimes, when clients build a relationship of trust with their suppliers and are repeat customers, they even share their sales data with them so that the supplier can anticipate orders and make arrangements for it (such as ordering the raw materials) even before you formally place the order with them. This too can considerably reduce lead time.