A few years ago, I managed a landscape wholesale distribution store. The corporate owners relied on a just-in-time inventory replenishment strategy to reduce overhead costs. It maximized warehouse space to avoid higher rent.
The strategy also emphasized precise inventory control. It worked until customers’ buying habits exploded and the lead time in the supply chain changed. Then there wasn’t enough stock on the shelves, and there were times I couldn’t predict when a product would arrive.
In partnership with company buyers, we used an ABC inventory analysis to reset reorder thresholds to minimize the lead time in inventory replacement. Determining which products to stock and in what quantities boiled down to meeting customer expectations, achieving year-end goals, and evaluating the inventory turnover ratio.
The store was a new location and aggressively building a customer base, so it took time to learn customers’ buying habits. It took nearly 18 months to master the lead period needed for an optimal inventory turn.
Here are a few tips and tricks I learned to help reduce long lead times and satisfy customer needs.
Overview: What is lead time?
Lead time is the length of time it takes to make, sell, and deliver a product. Lead times fall into four categories.
- Customer lead time: How long it takes for an item to reach a customer after an order is placed.
- Materials lead time: The time that passes between placing an order with a supplier and receiving it into inventory.
- Manufacturing lead time: How long it takes to physically make and ship a product.
- Total lead time: The total length of time it takes for an item to be manufactured, shipped for stock, and delivered to customers.
Why is it important to track lead time?
Customers are used to instant, or near-instant, gratification. The longer a customer waits, the more the risk increases of losing a sale or a repeat customer. Custom and specialty items are an exception, with most shoppers recognizing they have to wait.
5 ways to reduce lead time
There’s an anxiety-ridden, sinking feeling that comes with knowing a customer is waiting for an item. Not knowing when the product will arrive amplifies the angst. Not every piece of the supply chain is within your control. These five tips can influence what is under your control so you can reduce lead times.
1. Choose suppliers wisely
Supply chains are a partnership between manufacturers and sellers. Price is frequently the motivation for choosing one supplier over another. Lead time is equally important. Vendors with lengthy lead times cost more in lost sales than paying more per item from a reliable supplier.
Changing suppliers can be costly and can interrupt stock levels. Stocking up on a product before switching suppliers covers any gaps during the transition. Making the move to a new vendor can pay off in the long run, according to a study by .
2. Choose domestic suppliers when possible
Overseas suppliers are popular due to lower labor costs and lower overall prices. The tradeoff is an extended lead time. Waiting for products, or critical pieces needed for assembly, to travel across the ocean obviously increases lead times.
Using domestic manufacturers and suppliers when possible significantly reduces lead times. Weigh the cost of goods against a short lead time to decide if and what products can be ordered domestically rather than from foreign suppliers.
3. Order more frequently
Buying in bulk brings volume discounts and peace of mind on product availability, but waiting for those large orders to be produced and shipped increases lead times. Carrying excess inventory is also costly and risky for trendy or seasonal items that can become outdated. And, selling obsolete items at discounted prices or tossing them in the trash is like throwing dollar bills into the garbage.
Frequent smaller stocking orders trim back on waste and cut down on the length of time it takes to receive products. An inventory management software program can track data useful for forecasting needs and for getting order quantities right.
4. Use and share demand forecasting
It’s easy to blame a supplier for long lead times. Maybe they failed to plan for materials and don’t have enough to produce an item. You can help vendors prepare for your orders by sharing the demand forecasting models you use. Communicating with suppliers about anticipated large orders gives them time to prepare for producing and shipping items in a timely fashion.
5. Offer substitutions
Customers buying clothes, books, and home accessories can likely wait a few extra days for an order to arrive. However, buyers who need a product to finish a job or make a repair don’t often have that luxury. Substituting with similar products can satisfy urgent, immediate needs. That may mean absorbing a price difference between two similar items, but it helps to cement long-term loyalty.
Lead time best practices
Inventory is the lifeblood of your business. An effective inventory management system that accounts for the length of time it takes to receive and deliver an order means you’ll have the products needed to satisfy customer demands. A few best practices can help you cut down on your lead time.
Stay in touch with suppliers
Building solid supplier relationships is invaluable when it comes to reducing lead times. Regularly communicating with vendors keeps both groups updated on order progress. Communicating throughout the manufacturing and delivery process avoids last-minute surprises involving shortages or delays.
Have a plan
Buying without a plan risks missing out on discounts or special terms. Winging it can also mean ordering too much or too little inventory, which also affects lead times. Develop a model stocking plan based on your customer base. A model stocking plan identifies minimum quantities needed for each item and can be modified to meet fluctuations in sales volume.
The model must be flexible to allow the reorder points to increase as sales grow. Putting reorder minimums in place avoids low inventory levels that make your store look like a picked-over lunch buffet.
No one has time to manually count how many items are left in stock. Guessing how many units of an item are available is frustrating. A barcode inventory system takes the guesswork out of inventory control, plus an inventory management software system collects sales data and calculates inventory levels to improve forecasting. Working with precise reorder thresholds shrinks lead times.
Don’t underestimate the importance of lead times to support customer retention. Regular updates don’t technically help you receive the product faster, but they demonstrate that you’re working hard to take care of a customer.
Whether you change suppliers, implement an inventory management system, or change order frequency using strategies to shorten lead times — any or all such moves can positively impact your bottom line.