Purchasing lead time: what is it and why is it important?

To maintain the financial sustainability of a business and have satisfied customers, companies are under pressure to maintain lower costs and deliver quickly.

After all, consumers are increasingly sensitive to deadlines. For this reason, purchasing departments need to monitor their operations to avoid missing lead time, which translates to “waiting time”. Another factor that must be considered is inventory management, since a lack of materials can harm production and cause delays throughout the chain.

But the opposite can also happen and it is not positive. Excess inventory affects the company's turnover, generates more storage expenses and can even cause financial losses.

Given this scenario, it is essential that the company knows the lead time in purchases so that its supply chain operates in an optimized manner.

In this ME blog article, learn what lead time is in purchases and the importance of the indicator for your company's results.

Enjoy reading!

What is lead time in purchasing?

Lead time refers to the total purchasing cycle, that is, the period it takes for the product to be delivered to the end consumer, after going through all the production stages.

The knowledge of this KPI (key performance indicator) is essential for different activities of the purchasing department, such as planning and launching new products.

By understanding how long purchases take to be completed, managers can better plan the entire material acquisition process and maintain a continuous flow of operations.

Despite having a simplified concept, lead time has particularities that need to be explored in more depth, mainly to contribute to the evolution of your purchasing area.

The importance of purchasing lead time for business

In corporate strategies, lead time is the total time it takes for an item to go through all the production stages of the supply chain, which is more complex than delivery.

Lead time encompasses a series of crucial steps in a business, such as purchasing management, supplier management and a company's supply chain.

In a way, it is an indicator that also relates to logistics, as it includes the transportation of raw materials, assembly lines and storage.

All issues related to production and delivery time need to be considered when planning purchases and must be aligned with consumer expectations.

Why consider lead time in your purchasing processes?

Knowing the company's lead time encourages managers to better reflect on all the stages a product goes through until it is delivered to the customer.

Having access to lead time allows the adoption of methodologies to make the supply chain leaner and more productive, with reduced supply and delivery time for the customer.

Understanding lead time is also important for studying the purchase of materials and determining the right time to make a new acquisition.

When this does not happen, and products are purchased well in advance, materials can arrive much earlier than expected and generate unnecessary stock.

It may not seem like a problem, but accumulating supplies in stock is not ideal, especially if the items are perishable or toxic, for example.

For this reason, the more information, control and precision there is in purchasing management and the supply chain, the better the definition of lead time and the alignment of processes will be.

Factors that influence purchasing lead time

1. Suppliers

Supplier management is a crucial point in the supply chain. Being able to count on the best partners and having a diversified base is great for business and reduces a series of risks, as well as delays.

If a supplier has problems or does not have the expertise necessary on the segment and the products it sells, the negative impacts can be significant on lead time.

Therefore, approving and evaluating the performance of suppliers is extremely important.

2. Geographical position of the supplier

Having suppliers in very distant locations can cause problems with lead time. For products to be delivered on time, the cycle must consider transportation logistics.

Whether by road, sea or air, transporting products involves a series of unforeseen events and risks. Therefore, the lead time must be calculated based on these variables.

Ideally, you should look for suppliers located in strategic locations. If this is not possible, these potential risks must be taken into account when planning production.

3. Date of purchase

Managers plan the shipment of goods that will enter transit each day, taking into account a series of variables such as destination, volume, nature of the product, among others.

Therefore, monitoring order closing dates is essential to correctly calculate lead time.

Depending on the day of purchase, the purchase may need to remain idle for some time waiting for its turn to be shipped and continue on its journey.

4. Federal Revenue

The Federal Revenue Service is the government agency responsible for tax collection and for verifying cargo. Its actions are often unpredictable.

In other words, there is no way to predict whether inspectors will carry out a more detailed analysis of a product and this could delay the entire process of arriving at the destination.

Therefore, it is necessary to include this eventuality when determining the lead time.

How to calculate purchasing lead time?

Correctly calculating lead time is a practice that brings many benefits to the entire value chain and, of course, to customers.

Below, check out the processes to consider when defining your company's lead time.

1. Make a list of all the products requested

Create a list of all raw materials purchased to manufacture each item.

This table should also include possible repair or installation services, if these procedures are necessary to complete the product.

2. Know the required purchase period for each item

In the same table, organize the time it will take for each material to arrive. Calculate a safety margin of a few days taking into account unforeseen events (transportation, inspection, etc.).

Another important point that should be considered is whether the supplier only works on weekdays, for example.

3. Separate items with longer delivery times

Items that have a longer delivery time should be highlighted on the list. Note exactly how long it will take for them to arrive.

If you have an inventory of supplies to begin production, assign a lead time of one day for the manufacturing of that item to begin.

4. Determine the number of days/hours to manufacture the products

Analyze and record: how long does it take for your company to produce a batch of a given product after receiving the essential inputs?

Another aspect to consider: are the machines needed for production working in perfect condition? If they need repairs, the final time may change.

5. Add waiting times and possible variables

Add the lead time required to source a product’s inputs—or to get a crew and schedule a service to be installed—to the lead time required for manufacturing.

This total that joins the waiting points for the order and the end of production represents the lead time that an item takes to be available for delivery to the customer.

Technology is an ally in controlling purchasing processes

Most companies find it challenging to control the B2B purchasing cycle. And to significantly reduce lead time, it is essential to have optimized and efficient management.

In this sense, technology is a great ally for professional buyers. Our e-Procurement solution automates purchasing processes, reducing errors, bottlenecks and rework.

Using this tool, the purchasing department can improve the control and performance of its company's processes, including lead time management.

Furthermore, the purchasing team can enter the necessary parameters into the system and only consider suppliers in the processes that are prepared to meet all requirements.

In just a few clicks, professionals can generate reports and view data and indicators that present better options for all business operations.

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