Purchase Order Lead Time (POLT) is the time needed for a product to get at its destination after a company makes and order. On other words, is the estimated time to receive an order after its placed.
The purchase order lead time varies a lot, depending on a lot of factors. For example, the quality of the materials, the quantity at supplier’s stock, the location of the supplier’s warehouse and even seasonal points on traffic and climate.
What composes Purchase Order Lead Time?
The composition of the lead time includes different steps, for instance, it begins at the confirmation of the order, then it goes to the check of availability of the items.
After that, the order placement for transportation and acknowledgement of the order. Finally, there is the shipping notice and the receipt of the goods, concluding on the invoicing and payment.
The importance of knowing the time it takes for all of that to happen is because the production needs inputs to arrive on time. If it doesn’t, manufacturing will be delayed, and the company will lose money.
How to calculate Lead Time?
So, since lead time is given on days, it not hard to calculate the lead time. But its important to define which lead time you’re looking for, before applying the formulas.
For example, the Actual Order Lead Time is given by the formula:
A-OLT = Delivery Date – Order Entry Date;
As simple as that you can arrive at the time in days of your lead time. But there are others way to evaluate, for example, the Requested Order Lead Time, which is the time between the date when the order is placed and the requested delivery time by the customer.
It’s formula, much alike the A-OLT is:
R-OLT = Wish Date – Order Entry Date;
Besides those two, there’s also the Confirmed Order Lead Time, which is the confirmed lead time for a delivery of an order between consumer and the supplier:
C-OLT = Confirmed Date – Order Entry Date;
Advantages of calculating Purchase Order Lead Time
As we already established, a optimized way of knowing the lead time can help you develop a more profitable order process. Benefiting your business and your clients.
With a clear notion of your usual lead time, you can detect any problems on the order and act on time, reaching supplier or the warehouse. Also, it allows you to give more precise times for your clients, as you have a more concise calendar.
But mostly, you can adjust your orders accordingly to your needs, avoiding stockouts or excessive stock.
How to optimize Lead Time
There are some things you can do if you want to have a better suited lead time. One of them is purchasing order financing, if the payment stage is the one slowing the process.
Also, placing small orders frequently can speed up the process. Larger orders usually take more time to be prepared and delivered.
Finally, you can use software to control the whole operation, minimizing problems and mistakes and liberating your employees from repetitive tasks, so they can focus more on the strategic side of the business.
If you have control of your lead time and keep record between suppliers and partners, you can have a better decision-making process on orders. For instance, when a supplier can’t delivery on time, you can look for a better one.
As logistical complexities are global, you can reduce costs and time looking for suppliers locally.
In the end, companies must be able to carefully plan their ordering process and lead time is essential to keep everything going accordingly to the needs of the business.