Lead time is the amount of time needed between the order of a product or service and its delivery. Lead time management is the process of ensuring that actual lead times match those given to a customer. In a manufacturing environment, it can also apply to ensuring that production of items begins in time to prevent the warehouse or storage facility from running out.
Project managers are often responsible for lead time management. This frequently includes juggling several different lead times for the various components of a project so that all pieces are available when needed. Often, certain pieces are needed in order to create other pieces; the parts and the final products have lead times. In order to figure an overall timeline, the project manager must accurately estimate lead times for all items.
For example, a construction project requires the work of several subcontractors. The person installing the drywall may need four days to complete his work. He may be unable to begin, however, until the electrician completes the portion of his work on the inside of the walls. If the electrician needs four days and the drywall installer needs four days, the actual lead time for this portion of the project is eight days. Effective lead time management will account for the order in which these jobs must be done and allow enough time for both.
In a custom manufacturing environment, lead time management is similar. Purchasing managers must order raw materials, and the lead time for those materials must be factored into the overall production lead time. Delivery times must also be included. Only by including all these elements can the company provide an accurate anticipated due date to the customer.
Manufacturers who make set numbers of stock items and ship as ordered have additional need for lead time management. In these cases, running out of a product means disappointing customers and can mean lost sales. Most such companies automatically begin production again when inventory reaches a preset minimum. These minimums are determined by the average number of products normally sold during a period equivalent to the lead time for that product. Usually, the limits are set somewhat above the actual number to allow for fluctuations or delays in production.
Effective lead time management has a number of benefits. It allows manufacturers to use labor and machinery efficiently and helps set customer expectations. It is also critical to estimating cost of capital when a job is billed in arrears.