Purchasing Lead Time
Purchasing lead time refers to the time period from when a company places an order with a supplier to when the goods are received. It is a crucial aspect of inventory management and supply chain efficiency. This time includes the supplier’s processing time, production time (if the items are not readily available), and the shipping or delivery time.
A short purchasing lead time can increase a company’s agility and responsiveness to changes in demand, while a long lead time may require a company to maintain higher levels of inventory to prevent stockouts, which ties up capital and increases storage costs.
Here’s a simple example: A bicycle manufacturer orders 500 tires from its supplier. The supplier takes two days to process the order, another five days to produce the tires (if they are not readily available), and three days to ship them to the manufacturer. So the purchasing lead time for this order is 2 (processing) + 5 (production) + 3 (shipping) = 10 days.
In practice, companies often work to reduce their purchasing lead time, either by improving their own ordering processes, working with their suppliers to reduce processing and production times, or by finding faster shipping methods. They also often track their actual lead times to identify trends and issues, and to better predict future lead times for more accurate inventory management.
Example of Purchasing Lead Time
Let’s consider an example of a bakery, “The Sweet Tooth”.
- The bakery decides to launch a new kind of pastry that requires a specific type of flour not currently in their inventory. They identify a supplier and place an order for 200 pounds of this special flour.
- The supplier needs one day to process the order and pack the flour. Then, because the flour is a special type and isn’t readily available, it takes five days to mill and prepare it. Finally, it takes three days to ship the flour from the supplier to the bakery.
- So, in this case, the purchasing lead time would be calculated as follows:
- Order processing time: 1 day
- Production time: 5 days
- Shipping time: 3 days
This means that “The Sweet Tooth” would need to plan at least 9 days ahead when they need this special flour. If they don’t account for this lead time correctly, they might run out of this type of flour, which could halt the production of the new pastry.
This example illustrates the importance of understanding purchasing lead time in managing business operations and maintaining an efficient production schedule. It also shows why businesses often work to reduce this lead time, as shorter lead times can improve flexibility and reduce the amount of inventory that must be held.