5 ways to reduce long lead times in your supply chain

Reducing long lead times in your supply chain is critical to meeting customer demands on time and reducing inventory costs.

Reducing long lead times in your supply chain is critical to meeting customer demands on time and reducing inventory costs.
In today’s fast-paced and highly competitive environment, inventory planners face ongoing pressure to achieve the perfect balance between procuring the right amount of stock to meet customers’ expectations and avoiding additional costs to the business.

The unpredictable nature of demand and supply requires a clear understanding and visibility of each link in your supply chain. The weakest link is often the impact of long lead times on your inventory.

You can only achieve an effective supply chain through collaboration.

Your key focus should be gathering information from your demand and supply processes, analyzing the information, and then applying that information to take action and make the best possible planning decisions for your inventory.

There are two approaches to reducing lead times:

1. Understand the pressures and constraints your supply and demand are facing, and using that information,
2. Review your inventory processes to make the necessary changes to adapt and optimize your supply chain.

What is inventory lead time?

Inventory lead time is the length of time from when you place a purchase order with a supplier, taking into account the internal processes, such as waiting for approval to place the order to when the order is available for sale to the customer. Your lead time will affect your overall inventory fill rate, i.e., your ability to service your customer with the current stock you have on hand.

From placing the purchase order to the stock arriving safely to the customer, inventory planners must be aware of additional delays and how these will affect lead times.

Various lead times to know:

• Supplier lead time: The time from when the supplier receives the purchase order to when the order is shipped.

• Production lead time: It’s the time from when the raw materials are requested from your warehouse to when it is available for production. Production disruptions, such as a shortage of materials or labor shortages at the assembly stage, can increase lead times and be extremely costly for your business.

• Delivery lead time: Is the time it takes to collect the finished product from the dispatch bay to deliver the stock to the customer. Internal disruptions can also impact long lead times during this process. Suppose the customer order is not an “over-the-counter sale.” In that case, the process of capturing the customer’s order, allocating the stock, picking it, moving it to the dispatch bay, preparing for delivery, and raising the delivery note are components where delays can occur. External disruptions can also happen during this process, such as transport congestion, delays at ports, or a shortage of trucks, which can affect your stock arriving on time.

How do you calculate lead time?

Lead time = the time required to first generate the order, process the order, place the order + the suppliers quoted or anticipated delivery time

When do you need to factor in lead time into your inventory planning?

When you’re calculating:

• Reorder level
• Cover forward or order-up-to-quantity
• Safety stock

What is lead time performance, and why is this important in your supply chain?

Lead time performance measures supplier lead time based on early or late order deliveries. Given that lead times are essentially an external variable determined by your suppliers, you don’t have 100% control over them. It’s, therefore, critical to monitor and measure their lead time performance.

To measure lead time performance, you need two processes in place:

1. You need a demand-and-supply planning solution to help monitor your supplier’s lead times
2. A mechanism to quickly update the new lead times in your system

All stock items will have an allocated supplier, meaning each supplier will have its specific lead time. If you’re sourcing a particular stock item from multiple suppliers, that item will have more than one lead time. If your supplier consistently delivers stock late, this will impact the amount of safety stock you need to meet your demand and increase your inventory costs.

What causes extended lead times?

Although you can’t control your supplier’s lead times, inventory planners, operations, and sales teams must stay informed about disruptions in the supply chain and understand how they can increase lead times.

Examples of disruptions that will affect supplier lead times:

• Erratic customer demands
• Shortage of raw materials
• Transport delays
• Shortage of cargo containers
• Labor shortages
• Natural disasters such as fires and hurricanes
• Production capacity
• Economic instabilities
• Trade wars
• Political instabilities

Five steps to reduce lead times in your supply chain

Step one: classifying your inventory

By classifying your inventory, you’ll quickly identify items that make the most significant contribution to your business. Regardless of the size of the inventory you’re managing, a vital step to help reduce the impact of lead times is to know which stock items you need to focus your attention on. We talk about the 80/20 rule a lot in managing inventory. This is where you focus on the 20% of your SKUs [stock-keeping units] that give you 80% of your sales by classifying your inventory.

So, how will classifying your inventory help reduce the impact of long lead times? You’ll save time and resources by prioritizing suppliers for your key products so that you can:

• Regularly review projected lead times on these critical products with suppliers before you place the order.
• Group your essential products with similar lead times, into categories with common delivery characteristics such as the same delivery lead time and lead time reliability. This will help you review essential stock items as a group instead of having to view each item’s lead time.
• Avoid using historical data for average lead times for a single line item. By grouping your lead times, you can use this data to continually upgrade and refine the expected lead time of the group of items.
• By identifying your key products, you can negotiate with relevant suppliers to maintain sufficient stock of these items.

Watch how Netstock automatically classifies your inventory.

Step two: work with reliable suppliers

It goes without saying that if you need to adapt your inventory processes to help reduce your lead times, you need a good understanding of your suppliers and their challenges. Remember: unreliable suppliers can put your business at risk.

Here are a few tips to ensure you optimize your supplier network

• Review how your suppliers perform. You should immediately know which supplier regularly delivers stock late or not in full quantity. With this information, you can review which stock items are impacted and whether those items form part of your key product grouping.
• Consider eliminating your unreliable suppliers.
• Communicate regularly with your reliable suppliers. Keep up to date with their pressures and their lead times for the stock items you need.
• Source alternate suppliers and ensure your new suppliers have the stock available to start supplying you immediately.
• Review your terms and conditions and the minimum order quantity or minimum pack sizes imposed by your suppliers.
• Share your sales forecast with your suppliers so they have a clear insight into your planning and can communicate with you immediately should they anticipate any challenges that may impact your stock items.
• An option worth considering is to use air freight suppliers instead of sea freight where possible. Even though air freight may be more expensive, the shorter lead time and lower safety stock level related to that item may result in lower stock holding costs and higher stock turns.

Step three: improve internal and external communication

With your team: Managing inventory doesn’t rest solely on the inventory planner’s shoulders. Your planning process requires input from the sales, marketing, and operations departments.

As a team, you should meet weekly to discuss:

• Information about upcoming sales and/or promotional campaigns must be discussed ahead of the supplier’s lead time to ensure that the necessary stock is available for these planned events.
• Market intelligence that may affect your suppliers and, in turn, their lead times. If you are starting to hear that there are delays in shipping, you can quickly call your supplier to establish if they will be affected and plan accordingly.

With your customers: Update your customers immediately if there will be any delays with their stock orders. While talking to your customers won’t directly help reduce your lead time, it will help with customer loyalty, building trust, and keeping the lines of communication open.

Step four: review your order frequency

Lead time is crucial for placing optimal orders. Consider ordering smaller quantities at a time to better manage the impact of long lead times and reduce risk. If you place bulk orders, you may think you will confidently have the stock you need and not experience any stock-outs.

However, think about the consequences:

1. Bulk ordering leads to large inventory quantities, which incurs additional costs like storage, labor, and insurance.
2. If a large order is delayed, you risk losing sales due to extended lead times and having your capital tied up in undeliverable inventory.

Ongoing supply chain disruptions will affect your order frequency. What’s the best ordering strategy?

• Factor in the minimum order quantity with the supplier. This will affect the replenishment cycle if the monthly demand for the product is below the requirement for the preferable replenishment cycle.
• Identify the stock items below the minimum level after the lead time. If you order those items today, the stock level will be at the minimum level on the day the next shipment arrives from your supplier.
• Calculate the safety stock needed for each of your key products based on a risk assessment of supplier performance and your forecast accuracy. The longer the lead time, the more safety stock you need to order. Safety stock should buffer you from late deliveries, under deliveries, or under-forecasts.

Step five: keep safety stock levels dynamic in line with changes to supplier lead time

Holding the correct quantity of safety stock for your high-priority items will safeguard you from the impact of extended lead times from your supplier. Many businesses adopt a set-and-forget mentality and set safety stock to a blanket number to cover for some time. For example, you set your safety stock level for each product item in January; by September, no one has reviewed that decision. You either have excess inventory or are experiencing stock-outs, and your customers buy elsewhere.

You should always review your safety stock levels because:

• Your supplier risks change, i.e., their lead times may vary.
• Your forecasts change and or,
• Your business objectives change.

Ideally, you should review your safety stock daily, and to do that, you need a reliable automated inventory planning solution.

Planning inventory with the right suppliers

Building strong relationships with the right suppliers is vital. Suppliers’ performance directly affects your response to demand changes, stock replenishment, and avoiding stock-outs. Reducing long lead times is crucial for meeting customer demands and minimizing inventory costs. By classifying inventory, working with reliable suppliers, improving communication, reviewing order frequency, and maintaining dynamic safety stock levels, you can mitigate the risks of extended lead times.