Purchasing lead time definition
/What is Purchasing Lead Time?
Purchasing lead time is the interval between when the decision is made to acquire goods and when the goods are received. This lead time is comprised of the following items:
Order preparation time. This is the time required to assemble the paperwork required to place an order with a supplier.
Supplier lead time. This is the internal time required by a supplier to ship ordered goods to the buyer.
Time in transit. This is the shipping time from the supplier’s location to the buyer’s receiving dock.
Inspection time. This is the time required to examine an inbound delivery at the receiving dock, to ensure that it complies with the buyer’s specifications.
Putaway time. This is the time required to move goods from the receiving dock to their designated warehouse locations.
One of the best ways to improve the performance of a business is to reduce its purchasing lead time, so that it can be more responsive in making its own deliveries to customers
How to Use Purchasing Lead Time
Purchasing lead time must be built into the order placement process, so that goods are ordered sufficiently far in advance to assure that they are received in time for their intended use. Consequently, purchasing lead time is quantified in a material requirements planning system. Without due consideration of this lead time, a company will suffer from ongoing product stockout conditions, as well as production runs that cannot be completed due to missing parts. This is a particular concern during periods of peak demand, when it may be necessary to increase quantities on hand in order to ensure that customer demand can be met.
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Example of Purchasing Lead Time
As an example of purchasing lead time, a retail company wants to purchase 1,000 units of a specific electronic item from a supplier overseas. This is subject to the following lead time components:
Order Preparation Time (2 days):
The company's purchasing team spends two days preparing the purchase order. This includes internal approvals, checking stock levels, and negotiating terms with the supplier.Supplier Lead Time (5 days):
The supplier takes five days to process the order and manufacture or allocate the required stock.Time in Transit (10 days):
Once ready, the shipment is transported via ocean freight, taking 10 days to reach the company’s nearest port.Inspection Time (1 day):
Upon arrival, the goods are inspected by the quality control team to ensure they meet the agreed-upon specifications. This inspection takes one day.Putaway Time (2 days):
After inspection, the goods are moved to their designated storage locations within the warehouse. This process, including updating inventory records, takes two days.
The total purchasing lead time is 20 days, which is calculated as follows:
2 days (Order Preparation) + 5 days (Supplier Lead Time) + 10 days (Transit) + 1 day (Inspection) + 2 days (Putaway) = 20 days
This example outlines how the entire purchasing process involves multiple stages, all contributing to the total lead time.