Lead-Time in Procurement – explained

Definition of Lead-Time in Procurement

Lead-time in procurement is the duration from the moment a purchase order (PO) is placed with a supplier until the ordered goods or services are delivered. It encompasses the entire process, including order processing, production, packaging, shipping, and final delivery.

In some rare cases, lead-time also includes the time required for supplier selection and contract negotiation, especially for customized or complex orders.

Measuring Lead-Time in Procurement

Accurately measuring lead-time is critical for effective supply chain management. Here are the key steps involved in measuring lead-time:

1. Order Placement to Order Acknowledgment:
   • This period starts when the buyer places the PO and ends when the supplier acknowledges receipt of the order. It includes the time required for internal approval processes, communication with the supplier, and confirmation of order details.
2. Order Acknowledgment to Production Start:
   • This phase covers the time from when the supplier acknowledges the order to when they start production. It often involves scheduling, resource allocation, and procurement of raw materials by the supplier.
3. Production Time:
   • The actual time taken by the supplier to manufacture or prepare the ordered goods. This duration can vary significantly based on the complexity and quantity of the order.
4. Production Completion to Shipment:
   • After production is completed, the goods need to be packed, labeled, and prepared for shipment. This phase also includes any necessary quality checks and documentation.
5. Shipping Time:
   • The transit time from the supplier’s location to the buyer’s designated delivery point. Shipping time is influenced by factors such as distance, transportation mode (air, sea, road, or rail), and any potential customs or regulatory delays.
6. Receipt and Inspection:
   • The final phase involves the time taken for the buyer to receive, inspect, and accept the goods. This step ensures that the delivered items meet the specified quality and quantity requirements.

Measuring On-Time Delivery

On-time delivery (OTD) is a crucial performance metric that indicates the percentage of orders delivered within the agreed lead-time. To measure OTD, follow these steps:

1. Define the Timeframe:
   • Determine the specific period for which you want to measure OTD, such as monthly or quarterly.
2. Set Delivery Expectations:
   • Clearly define the expected delivery dates for all POs during the selected timeframe.
3. Track Actual Deliveries:
   • Record the actual delivery dates of the orders and compare them against the expected delivery dates.
4. Calculate OTD Percentage:
   • Use the formula:OTD Percentage=(Number of Orders Delivered On-TimeTotal Number of Orders)×100
   • OTD Percentage=(Total Number of OrdersNumber of Orders Delivered On-Time​)×100

The Complexity of Measuring On-Time Delivery with different Incoterms

Incoterms, or International Commercial Terms, define the responsibilities of buyers and sellers for the delivery of goods in international transactions. They clarify who is responsible for tasks such as transportation, insurance, and customs clearance, and they establish the point at which the risk transfers from the seller to the buyer. These terms are crucial for determining lead-time and on-time delivery performance, but they also introduce complexities in measuring on-time delivery due to the varying points of delivery.

Impact of Different Incoterms on Measuring On-Time Delivery

1. EXW (Ex Works):
   • Point of Delivery: The seller’s premises.
   • Implication: The buyer is responsible for the entire transportation process from the seller’s location. On-time delivery measurement must account for the buyer’s arrangements, making it difficult to isolate the seller’s performance.
2. FCA (Free Carrier):
   • Point of Delivery: A named place where the goods are handed over to the carrier.
   • Implication: The seller’s responsibility ends once the goods are delivered to the carrier. Measuring on-time delivery involves checking if the seller met the handover deadline, but the subsequent transit time is managed by the buyer or their carrier.
3. CIF (Cost, Insurance, and Freight):
   • Point of Delivery: The port of destination.
   • Implication: The seller handles the transportation up to the destination port, including insurance. On-time delivery measurement must consider the entire shipping duration controlled by the seller, but customs clearance and final delivery to the buyer’s location fall under the buyer’s responsibility.
4. DAP (Delivered at Place):
   • Point of Delivery: A named place of destination.
   • Implication: The seller is responsible for delivering the goods to a specified location. On-time delivery measurement is straightforward as the seller manages the entire process until delivery to the buyer’s site.
5. DDP (Delivered Duty Paid):
   • Point of Delivery: The buyer’s premises.
   • Implication: The seller assumes all responsibilities, including duties and taxes, until the goods are delivered to the buyer. Measuring on-time delivery is simpler because the seller controls the entire supply chain.

Challenges in Measuring On-Time Delivery

1. Multiple Handover Points:
   • With Incoterms like FCA and EXW, the transfer of responsibility and risk occurs early in the supply chain. This introduces multiple handover points where delays can occur, complicating the measurement of on-time delivery. It requires tracking not just the seller’s performance but also the logistics providers’ and the buyer’s coordination.
2. Differing Responsibilities:
   • Incoterms allocate responsibilities differently, which affects how delays are attributed. For instance, under CIF terms, if the shipment is delayed at sea, the seller is accountable. However, under EXW terms, the buyer is responsible for any delays after goods leave the seller’s premises.
3. Variable Transit Times:
   • Different modes of transport (air, sea, road, rail) have varying transit times, and Incoterms influence the choice of transportation. This variability makes it harder to standardize on-time delivery metrics across different suppliers and shipments.
4. Customs and Regulatory Delays:
   • For Incoterms like CIF and DDP, customs clearance is included in the seller’s responsibilities. Delays in customs can affect on-time delivery measurement, and attributing these delays correctly is challenging. Under terms like EXW and FCA, customs delays fall under the buyer’s scope.
5. Document Handling:
   • Some Incoterms require the seller to handle documentation until a specific point, after which the buyer takes over. Mismanagement of documents at any stage can cause delays, complicating on-time delivery measurement.

Strategies to Mitigate Measurement Challenges

1. Clear Contractual Agreements:
   • Establish clear terms in contracts, specifying the expected delivery dates and the point of delivery according to Incoterms. This clarity helps in setting benchmarks for on-time delivery measurement.
2. Integrated Supply Chain Systems:
   • Use advanced supply chain management systems that integrate data from all stakeholders, including suppliers, logistics providers, and customs brokers. These systems can track and provide real-time updates on shipment status, helping to measure on-time delivery accurately.
3. Collaborative Relationships:
   • Foster collaborative relationships with suppliers and logistics providers to ensure better coordination and transparency. Regular communication can help identify potential delays early and implement corrective actions.
4. Customized Performance Metrics:
   • Develop customized performance metrics that consider the specific Incoterms used. For example, create separate on-time delivery KPIs for EXW and DDP terms to account for the different responsibilities and risk transfer points.
5. Regular Audits and Reviews:
   • Conduct regular audits and reviews of the delivery performance against the agreed Incoterms. This helps in identifying recurring issues and improving processes to enhance on-time delivery rates.

The Value of Short Lead-Time in Procurement

Short lead-times offer several advantages for professional buyers:

1. Enhanced Flexibility:
   • Shorter lead-times allow buyers to respond quickly to market changes and customer demands. This agility can be a competitive advantage, enabling faster product launches and adaptations.
2. Reduced Inventory Costs:
   • With shorter lead-times, companies can maintain lower inventory levels, reducing holding costs and minimizing the risk of obsolescence. Just-in-time (JIT) inventory systems are particularly effective in such scenarios.
3. Improved Cash Flow:
   • Faster turnaround times mean quicker conversion of inventory into sales, enhancing cash flow and overall financial health.
4. Higher Customer Satisfaction:
   • Meeting customer demands promptly leads to higher satisfaction and loyalty, positively impacting brand reputation and repeat business.
5. Lower Risk of Disruption:
   • Shorter lead-times reduce the exposure to supply chain disruptions and delays, ensuring more consistent and reliable operations.

Implications of Variable Lead-Time in Procurement

When lead-times are not fixed and vary over time, several challenges can arise:

1. Increased Uncertainty:
   • Variable lead-times create uncertainty in planning and forecasting, making it difficult to ensure timely product availability. This can lead to stockouts or excess inventory.
2. Complex Inventory Management:
   • Managing inventory becomes more complex with fluctuating lead-times. Safety stock levels may need to be higher to compensate for variability, increasing holding costs.
3. Impact on Production Schedules:
   • Production planning relies on predictable material availability. Variable lead-times can disrupt production schedules, causing delays and inefficiencies.
4. Supplier Reliability Concerns:
   • Consistently variable lead-times may indicate reliability issues with suppliers. This can prompt buyers to seek alternative suppliers or renegotiate terms to ensure more stable lead-times.
5. Customer Service Challenges:
   • Meeting customer delivery expectations becomes harder with variable lead-times, potentially leading to dissatisfaction and lost sales.

Managing Variable Lead-Time in Procurement

To mitigate the challenges of variable lead-times, procurement professionals can adopt several strategies:

1. Supplier Collaboration:
   • Work closely with suppliers to understand the causes of lead-time variability and collaborate on solutions. This may include process improvements, capacity planning, or better communication.
2. Supplier Diversification:
   • Diversify the supplier base to reduce dependency on a single supplier. This can provide more options and flexibility in case of delays from one source.
3. Buffer Stock:
   • Maintain buffer stock for critical items to cushion against lead-time variability. This approach helps ensure continuity of supply but must be balanced against the costs of holding additional inventory.
4. Advanced Planning Systems:
   • Implement advanced planning and scheduling systems that can dynamically adjust to changes in lead-time and optimize inventory levels accordingly.
5. Contractual Agreements:
   • Negotiate contractual agreements with suppliers that include penalties for delayed deliveries or incentives for consistent performance. This can help align supplier performance with buyer expectations.

Summary Lead-Time in Procurement

Lead-time is a fundamental term in procurement that influences many aspects of supply chain management. Understanding how to measure and manage lead-time, the implications of delivery terms, and the impact of variable lead-times is crucial for optimizing procurement operations. By prioritizing short and consistent lead-times, professional buyers can enhance flexibility, reduce costs, improve customer satisfaction, and mitigate risks, ultimately driving better business outcomes.

Incoterms play a crucial role in international trade by defining the responsibilities of buyers and sellers. However, they also introduce complexities in measuring on-time delivery due to varying points of delivery and differing responsibilities. By understanding these challenges and implementing strategies to mitigate them, procurement professionals can more accurately measure and improve on-time delivery performance, ensuring a more efficient and reliable supply chain.

A Purchase order is the most important document at a Procurement function. Learn why in the online course about the Purchase Order.

Note: Illustration to the blogpost “Lead-Time in Procurement for buyers” was created by Chat-GPT on June 13, 2024.

Information about our Online Procurement courses in Swedish.