Lead Time and Time Compressions

In procurement management, lead time refers to the time it takes

for a good or service to be procured and delivered to the
customer.

It encompasses the entire procurement process, from identifying

the need for the good or service to placing the order with the
supplier, receiving the delivery, and inspecting the goods or
services for quality.

Purchasing lead time starts when the goods or services are ordered and ends when they are received. This lead time
includes availability confirmation, ordering, order acknowledgement, shipping notice, receipt of goods or service, invoice
recording and payment.

Purchase processes are less customized than procurement processes and tend to have similar best practices across
various types of businesses.

Lead time is a critical factor in procurement management as it impacts several aspects of the business, including:

 Inventory Management: Accurate lead time information helps businesses maintain optimal inventory levels,
ensuring they have enough stock to meet customer demand without overstocking.

 Production Planning: Lead times influence production planning, allowing businesses to schedule production runs
and manage resource allocation effectively.

 Customer Satisfaction: Timely delivery of goods or services is crucial for customer satisfaction and maintaining a
positive brand reputation.

 Cost Management: Longer lead times can lead to higher inventory carrying costs, while shorter lead times may
increase procurement costs due to expedited shipping or rush orders.

 Supply Chain Risk Management: Understanding lead times helps businesses identify and mitigate potential
supply chain disruptions that could delay deliveries.

To effectively manage lead times, businesses should:

 Gather Lead Time Data: Collect historical lead time data for different goods and services from suppliers to
establish baselines and identify trends.

 Analyze Lead Time Factors: Analyze the various factors that contribute to lead times, such as supplier production
cycles, shipping distances, and customs clearance procedures.

 Negotiate with Suppliers: Negotiate with suppliers to establish realistic and consistent lead times that align with
business requirements.

 Monitor Lead Times Continuously: Continuously monitor lead times and identify any deviations from
expectations to take corrective actions promptly.

 Implement Lead Time Reduction Strategies: Implement strategies to reduce lead times, such as supplier
consolidation, inventory optimization, and just-in-time (JIT) delivery.

By effectively managing lead times, businesses can improve their operational efficiency, enhance customer satisfaction,
and optimize their supply chain performance.

How to Calculate Lead Time

Lead time can be broken in several different components: the pre-processing, the processing, and the post-processing.
These may be defined or stated differently, but the general formula to calculate lead time is:

Lead Time = Pre-Processing Time + Processing Time + Post-Processing Time

For a manufacturing company, the pre-processing time is the procurement stage where raw materials are sourced and
delivered to its manufacturing headquarters or processing plant. The processing time is the manufacturing stage. The
post-processing time is the stage of processing the order and delivering the final good to the customer.

Lead Time for Manufacturing Company = Procurement Time (for raw materials) + Manufacturing Time + Shipping
Time

For a retail company, there is no manufacturing time as the retail firm does not manufacture its own good. In addition,
the procurement time is different as instead of procuring raw materials, it sources final products to then sell directly to
customers.

Lead Time for Retail Company = Procurement Time (for final products) + Shipping Time

Time Compression& Competitive Advantage

Time compression in procurement management refers to the systematic effort to reduce the overall time it takes to
procure goods and services.

It involves identifying and eliminating non-value-adding steps in the procurement process, streamlining workflows, and
improving collaboration among stakeholders.

Benefits of Time Compression in Procurement Management:

 Reduced Costs: Time compression can lead to significant cost savings by reducing inventory holding costs,
minimizing procurement expenses, and optimizing resource allocation.

 Improved Customer Satisfaction: Shorter lead times enable businesses to deliver goods or services faster to
customers, enhancing satisfaction and loyalty.

 Increased Agility and Competitiveness: Time compression makes businesses more agile and responsive to
changing market conditions, allowing them to adapt quickly and maintain a competitive edge.

 Enhanced Supply Chain Efficiency: By streamlining the procurement process, time compression contributes to a
more efficient and reliable supply chain, reducing disruptions and ensuring consistent product availability.

Strategies for Time Compression in Procurement Management:

 Streamline Requisition and Approval Processes: Automate requisition and approval processes to eliminate delays
and manual data entry.

 Consolidate Suppliers: Reduce the number of suppliers to simplify communication, streamline order placement,
and potentially negotiate better pricing.

 Implement Electronic Data Interchange (EDI): Utilize EDI to exchange procurement data electronically with
suppliers, reducing errors and expediting the ordering process.

 Adopt Just-in-Time (JIT) Delivery: Implement JIT delivery to receive goods or services only when needed,
minimizing inventory levels and reducing storage costs.

 Enhance Supplier Relationships: Build strong relationships with key suppliers to foster collaboration, open
communication, and proactive problem-solving.

 Leverage Technology: Utilize procurement management software and automation tools to streamline tasks, track
progress, and optimize decision-making.

 Continuous Improvement: Continuously monitor and analyze procurement processes to identify areas for further
improvement and implement corrective actions.
 Time-based Competition

Time-based competition is a demonstration of the power of time management, and how companies can use it to gain a
competitive advantage. For companies that make best use of time as they respond and adapt to changes in the market
and other possible conditions and obstacles, they will gain an adaptive advantage.

Many leading companies achieve competitive advantage by focusing on management of time, whether it is in
production, product development, distribution, or service. Time differs from other resources. It cannot be purchased like
labor or capital equipment.

On-time Delivery

On-time delivery measures the percentage of orders delivered to customers on or before the promised delivery date. It
helps evaluate the efficiency of the supply chain in meeting customer expectations. On-time delivery is crucial for
maintaining high customer satisfaction levels.
Why is OTD Important?

 On time delivery drives better collaboration with your customers, ensures reliability of delivery and most

importantly customer loyalty.

 Customers expect you to meet the promised delivery date. It is important to set the right expectations with your

customers and meet them. If you can’t meet your customer’s expectation and deliver on time then they will find

a supplier who can.

 Consistent problems with on-time delivery will not only disrupt your business or result in loss of reputation but

will also affect many other areas of a company’s supply chain and can irreparably damage customer relationship

and long-term success.