Lead Time: More or Less?

by Dave Garwood

Any discussion of lead times almost always reveals these common misconceptions:

• If you are not sure if the lead time should be 4 or 6 weeks, what do you use? The reply is often 8!
• If given truth serum, most people feel that if a little lead time is good, more has to be better!
• If delivery of material or product is often late, then increase the lead time, order sooner and increase the odds material will arrive on time.
• Better to order too early than too late, so err on the high side when it comes to lead time.
• The date material is needed depends on it’s lead time.

All these traditional views are incorrect and lead to serious supply chain management problems. The symptoms are excess inventory, excess costs and missed customer deliveries -- all bad -- and all can be avoided.

Clearing Up the Confusion
Lead times are used up and down the supply chain. For example, every business has to deal with customer delivery lead times, i.e. how long customers are willing to wait for a product after ordering it. Customer delivery lead time has nothing to do with how long it takes to get material and make the product. Competition determines the accepted delivery lead time. If your competitor delivers pizza in 30 minutes, you'd better have a very unique pizza or delivery in 30 minutes. We also have a totally independent set of lead times to manage the supply side of the supply chain.

Think of the plant floor or supplier as a resource (shown as a funnel in the graphic below). Work flows into the resource, waits it’s turn, gets worked on until complete and flows out. Simple! The resource could be either people and equipment on the plant floor or a supplier. The lead time is the sum of three elements: (1) how long it waits (2) how long it takes to get ready to do the work (set up or changeover time) and (3) how long it takes to do the work (touch time).

There are several different categories of “lead time” in every business. Every business has internal and external lead times. Internal lead times or manufacturing lead times are for items they make. External lead times or supplier lead times are for items they buy. There are also planned and actual lead times for both.

Planned lead time is the elapsed time between ordering material from the plant or supplier and when you expect to get it. This lead time is primarily a function of the queue or the time it normally waits to be worked on. On the plant floor, this is determined by the size of the work-in-process (WIP). For items coming from suppliers this is a function of their customer order backlog. In both cases, the wait or queue time is based on an average Q and it varies. For this reason the term “accurate lead time” is an oxymoron.

The actual lead time is how long it actually takes between the time material is ordered and when it arrives. This also varies each time the item is made. The actual lead time is a function of the priority of the item ordered. When the boss says, “I want this done today or else," what’s the Q time? Zero! Red tags and Hot Lists can have the same impact. When a major customer says I need the item today, what’s the wait time or Q in the backlog? Zero! The actual lead time for “Hot Jobs” can be compressed to less than the planned lead time. We just can’t compress them all! All other items move back in line and wait longer when a new order is pushed to the front of the line.

The flip side is also true. When no one seems to be expediting an item, the actual lead time could stretch into years. Just look at the layers of dust on some of the items on the plant floor. While the actual lead time will vary, the average actual lead time should equal the planned lead time.

Which of the lead time components, wait (Q), set up or run time accounts for most of the lead time? Of course the answer is Q time. The others are usually almost insignificant in determining the lead time. The planned lead time is not precise. A stopwatch is not needed to determine a good planned lead time. A number that is in the ballpark is all that can be expected and is needed. Avoid wasting time chasing a precise number.

The actual lead times will be managed by the scheduling system as priorities are communicated with kanban signals or due dates to determine the relative priority and thus how long the items wait until it’s their turn (some items hit the queue with a sinker on them, usually a red sinker and don’t wait at all). The planned lead times are managed by managing the capacity of the resource, ie the rate of flow out of the funnel compared to the rate of flow into the funnel. The average or normal Q is determined by the difference between the two. See "Capacity is Infinite" in our article archives. Different lead times in the business are a function of different parameters.

The Long and the Short of Lead Times
The disadvantage of lead times that are too short are usually readily understood. Everyone fears being caught short because material was ordered “too late." The natural reaction is to play it safe and order early, rather than late. This strategy often backfires. Does experience support the theory that ordering earlier, i.e. increasing the lead time, increases the odds of on-time delivery? Nope! In fact, experience proves the opposite. When shipments are late or suppliers are late, it is not likely that wrong lead times make the top of the Pareto charts of root causes of late deliveries. Lengthening lead times to solve material shortage probems usually becomes a liability, not an asset.

The advantages of shorter lead times are often not as obvious, understood and acknowledged. The lead time determines when material must be received prior to shipping the product. The longer the lead time, the earlier material is received and thus the lower the inventory turns. Lead times also determine when commitments are made to suppliers. Longer lead times mean supplier commitments are made based on a build schedule that is farther out in the future and less certain. These commitments can be difficult and costly to reverse. We can get stuck with the inventory and reduced cash flow. Shorter lead times also mean we can respond faster to increasing customer demand.

Assume we are going to be out of stock in 4 weeks on an item. When is the item needed if the lead time is 2 weeks? When is the item needed if the lead time is 8 weeks? The answer is the same -- need it in 4 weeks. We need it when we need it, regardless of the lead time. Lead time just helps determine when to trigger authorization to the plant floor or supplier to start producing the item. It also triggers the time when the customer assumes the financial liability.

All that glitters is not gold. Lead times have a huge impact on the business and longer lead times are a liability. The focus should be on reducing planned and actual lead times, not looking for justification for longer ones.


Lead Time or Cycle Time?
Many JIT, Lean or Flow manufacturing initiatives have been successful at significantly reducing both planned and actual internal lead times. The traditional view of arranging the plant floor equipment into functional departments such as drilling, welding, board subassembly, packaging, etc., was replaced by arranging the equipment into work cells or focused factories. Material flows directly from one step to the next, not stopping. Queue or wait time is essentially shrunk to zero -- between manufacturing steps. Cycle time (time to make the product) is reduced. Lead time may not necessarily be reduced. In some cases, the queue is pushed upstream, i.e. before the work gets started.Be sure to distinguish between lead time and cycle time reduction.

Lead times drive inventory investment, flexibility and customer service. Better planning coupled with a “Lean Process” will get the desired result -- shorter lead times.

Lead Time and Flexibility
Flexibility is the ability to change the build or production schedule up or down, make it happen and incur little or no extra cost or financial liability. Both the ability to get additional resources resources (capacity) and material constrain the degree of flexibility. Planned lead time is a major indicator of the material constraint. The diagram below represents the items (blue squares) required to build the product. The only difference in this diagram from company to company is the number of blue squares.

If we determined a planned lead time for each blue square, drew a line to scale for the length of the lead time and rotated the diagram 90 degrees counter-clockwise, the result would look like this:

The time fence is the period of time in the future when flexibility starts to be reduced. In this example, 26 weeks. When the schedule crosses the fence, we start to "order" items. First B, then F, then D, etc. If the schedule "jumps" the fence to say week 18, we can't meet the schedule unless lead time for B and F are compressed. The time fence cannot be a management mandate or arbitrarily assigned. It is a function of the cumulative planned lead times. The objective should be to focus on reducing the lead times as much as possible, which will reduce the time fence.

Here is an interesting fact: 80% of the time fence is almost always caused by the supplier lead times. Yet many lean manufacturing initiatives only focus on reducing internal or plant lead times, not supplier lead times. There are huge advantages to reducing internal or plant floor lead times. However, the big flexibility payoff is reducing external or supplier lead times.

Slashing Lead Times to Increase Profits
Lead time confusion can be a serious disease. Lead times are used in very business and drive many of the results we see on financial performance and customer satisfaction reports. Make sure everyone understands the different types of lead times, what elements need to be carefully managed and seek continuous improvement to high quality lead times, aka short ones! It will help lead your business to profitable growth.