Retailers are only able to provide customers with their goods if the suppliers can fulfill their end of the bargain as well. Therefore, if vendors delay inventory shipments, businesses are unable to fulfill their customers' orders on time.
By practicing lead time reduction, companies can minimize their wait time for inventory orders to meet customer demand consistently.
What is Lead Time?
Lead time refers to how long it takes a business to process and complete an order. In other words, the lead time is the amount of time it takes a customer or company to receive their order. This starts when the order is placed and ends once the package reaches its final destination, whether that is another business or the consumer.
For example, if a business places a product order with their supplier and receives their shipment 10 days later, the lead time for that specific item is 10 days. However, lead times often vary between different vendors and types of inventory.
For retailers, the lead time is an essential tool for calculating reorder points and safety stock to ensure they always have enough products to meet customer demand. Reorder points trigger inventory orders once stock levels dip below a healthy level. When calculated correctly, reorders buy the company enough time until they receive their shipments.
Even with demand forecasting, companies may experience unexpected spikes in demand due to passing fads. In these situations, it is vital for businesses to have additional stock, or safety stock, to fulfill customer orders while more inventory is ordered.
This prevents stockouts and backorders. Otherwise, stockouts could lead to unsatisfied customers that seek out their desired products elsewhere.
8 Lead Time Reduction Strategies
Now more than ever, consumers expect to have their orders as soon as possible. This means that retailers also need to receive their inventory quickly. The longer businesses make their customers wait, the more likely they are to leave.
Aside from creating impatient customers, extended lead times can also cost companies significant capital, from lost sales, inflated inventory costs, and expedited shipping. Therefore, organizations should consider the different methods of lead time reduction.
Handling multiple suppliers sometimes has more cons than pros, as businesses tend to overlook lead times and make logistical mistakes. This can significantly elongate wait times for customers.
Instead, companies should limit their backup suppliers to one or two, and consolidate other vendors.
Sometimes vendors provide similar inventory for competitors within the same market, making it difficult for either business to gain a competitive edge. However, companies can incentivize reduced lead times by offering bonuses for every early delivery.
This encourages the vendor to prioritize the business's shipments over other clients, giving them the first chance at new product shipments.
Order Inventory Frequently
Many businesses purchase their inventory in bulk to receive wholesale or discounted prices, believing it to be cost efficient. However, buying in bulk sometimes elongates lead times, costing the company potential sales and new customers. Depending on the lead time duration, this could actually cost the organization more than they are saving.
Instead, businesses should perform a total cost analysis to determine if ordering smaller batches at higher frequencies minimizes labor and carrying costs, as well as lead times.
Share Sales Data with Suppliers
Companies can reference previous sales data to predict their future inventory needs. Demand forecasts give businesses the chance to alert their suppliers ahead of time to avoid late deliveries. Vendors can set the order aside until they receive the alert to make the shipment.
Automate Inventory Management
Relying on manual data consolidation often means that companies do not realize that they are understocked until it is too late. With automated inventory ordering software, businesses have access to real-time inventory data and are immediately alerted with levels that are dangerously low.
Advanced ordering solutions can even be programmed to automatically submit a purchase order when products reach their reorder points to prevent stockouts.
Use a Domestic Supplier
By switching to a domestic supplier, companies significantly reduce their lead times by up to several weeks, depending on the type of inventory. This way, businesses do not have to worry about delays regarding customs and international regulations.
Use Standard Components
Customized components have significantly longer lead times as each product requires special attention. If businesses are able, they should switch to standard components that can be shipped in bulk and supplied quickly. Standard components also require less funding for engineering, production, and labor, making them cost-effective.
However, companies that require customized components should use experts in their field that work efficiently, rather than startups that are still learning.
Consider Kitting Services
Kitting refers to assembling products that have multiple parts. Businesses that establish kitting processes are able to group parts that are frequently used together to reduce lead times.
Creating already assembled batches also improves efficiency, productivity, and order fulfillment accuracy, as employees do not have to dedicate time picking individual components.