How to reduce long lead times in inventory management

Mar 5, 2024 • 8 min

Upstream and downstream factors make it difficult for a company to optimize their inventory management processes. Consumer behavior is ever-changing, and suppliers constantly deal with their own supply chain challenges. When demand changes in one direction and supply in another, retailers and wholesalers often face long lead times for the products they desperately need.

Long lead times aren’t just a minor inconvenience. They limit a business’ ability to provide the in-demand goods when consumers want them most. And when consumers can’t get what they want, they tend to find it elsewhere — namely, at the nearest competitor that does carry the product in question.

In an increasingly competitive market, companies must take a proactive approach to managing long lead times — one that preserves customer loyalty, reduces costs, and ensures availability at a time when certainty is hard to come by.

What is lead time?

Lead time is the time it takes to finish a process once it starts. In inventory management, lead times specifically refer to the time between when an order is placed for additional products and when those products are received and ready for sale.

Commonly, businesses calculate lead time by adding together the time it takes to:

Process an order internally.
Have the supplier produce or prepare the goods.
Ship the goods from the supplier.
Inspect the goods once they arrive.

Businesses hoping to achieve greater efficiency and cost savings look to minimize lead times. Short lead times enhance flexibility, allowing businesses to adjust swiftly to demand changes and maintain lower inventory levels. This flexibility reduces storage costs and minimizes the risk of excess stock. Additionally, inventory planning that aligns with actual market demand decreases the capital tied up in unsold goods and improves cash flow.

Certain phases of a product’s lead time are set in stone, such as shipment time. If it takes four weeks to ship a finished product from Point A to Point B, then it’s going to take four weeks. The greatest opportunities for retailers and wholesalers to reduce lead time come before this point, when suppliers plan production, source raw materials, and other related responsibilities. This makes working closely with suppliers — and providing them with accurate information — essential for businesses seeking shorter lead times.

3 causes of long lead times in inventory management

In a perfect system, it would always take the same amount of time to produce and ship a good to a store — a short time. The reality is more complicated, as many variables might impact production, consumer demand, or both.

Fig. 1: Actual lead times often differ from optimal lead times due to the volatility of the supply chain, with complications arising from sourcing to delivery processing.

The biggest causes of long lead times in inventory management include:

1. Demand forecasting inaccuracies

Inaccurate demand forecasting can significantly disrupt inventory management. Retailers and wholesalers plagued with forecasting errors often struggle to place orders optimally, forcing them to rely on suppliers with longer lead times. This misalignment between demand predictions and actual needs complicates their supply chain management efforts, extending lead times unnecessarily.

Retailers and wholesalers plagued with forecasting errors often struggle to place orders optimally, forcing them to rely on suppliers with longer lead times.

Such forecasting inaccuracies strain relationships with suppliers and can necessitate expedited shipping, which may be prohibitive for logistical or financial reasons. This strain negatively impacts inventory availability, often resulting in lost sales or excess on-hand stock.

2. Supplier-related issues

Supplier-related issues lead to long lead times when manufacturers face production problems that lead to bottlenecks. Examples include:

Equipment failures.
Labor shortages.
Raw material shortages.
Low stock levels.
Inefficient order processing systems.
Compliance and quality control concerns.
External complications, like inclement weather.

These issues result in delays, compounding when retailers rely on a single supplier or when alternative sources face similar problems.

Long lead times resulting from supplier issues can significantly impact a retailer’s or wholesaler’s ability to meet customer demand, leading to stockouts and lost sales opportunities. This situation can erode customer loyalty as consumers turn to competitors with better stock availability. Consistent supplier challenges force companies to hold higher safety stock levels, increasing inventory holding costs and negatively impacting cash flow and profitability.

READ NOW: Supply Chain Collaboration Report 2023

3. Internal inefficiencies stemming from manual processes

Long lead time can also stem from inefficient inventory management processes at retail and wholesale businesses, and a lack of automation is often the culprit. Teams manually enter and process data, which is tedious and can lead to errors. Companies lacking automation also rely on time-consuming, error-prone manual stock counting and ordering — and then lack the ability to track their inventory levels without adding additional work.

This reliance on manual systems slows down operations and hampers the ability of teams to make quick, informed decisions. A lack of up-to-date makes adapting to market shifts or supply disruptions slow and difficult, increasing the time between order placement and product delivery.

As more companies turn to automation to solve internal inefficiencies, those clinging to manual processes stand to get left behind.

This lack of visibility and agility is especially costly considering an Incisiv survey claims 31% of participating retailers plan to invest in inventory management technologies by 2025. As more companies turn to automation to solve internal inefficiencies, those clinging to manual processes stand to get left behind.

3 lead time reduction strategies

Long lead time products hurt retailers regardless of whether their suppliers are located internationally or locally. Retailers with international suppliers find that overseas transport, global holidays, and slow-moving products complicate their inventory management plans. Even retailers with local suppliers find that supply uncertainties and shipping delays hurt their ability to adjust as demand shifts, often forcing them to maintain higher safety stocks to buffer availability concerns.

The associated risks and frustrations of managing long lead time products are ever-present, but several strategies can help reduce their impact on a business:

1. Use a replenishment solution to optimize DC capacity and workload

Planning and visibility are paramount to running a smooth supply chain. Yet complex obstacles such as DC capacity and workforce availability can impact the ability for retailers to fill shelves with the right product at the right time.

One key practice is to look at a solution that can optimize replenishment. This type of solution can plan for inventory capacity, so retailers can only purchase the holding space they need and have the correct number of hands at their DCs to process incoming shipments. Companies can evaluate capacity needs to eliminate inventory holding costs while adequately forecasting workload, saving on labor expenses.

Effective capacity management can also support proper space for slow movers and excess long lead time inventory not ready to go on the shelf. This type of planning is essential during challenging shipping seasons, when inventory space may be less available and holding costs more expensive.

2. Prepare for international holiday disruptions in long lead time supply chains

Be aware of international events that can affect the efficiency of the supply chain — one prominent example being the Lunar New Year. The Lunar or Chinese New Year is a significant holiday that causes major factory shutdowns in China around January and February. Other countries with similar Lunar New Year holidays may also influence long lead time inventory from those regions. Suppliers may take a few weeks to resume full operations after holiday events, and long lead time products will be unavailable or in limited supply.

Prepare extra capacity to hold products during shutdowns and smooth delivery flow to increase inventory holding slowly over time. Planning for shutdowns like this can begin as early as June because some suppliers limit purchasing orders as early as October.

3. Monitor network inventory and strengthen relationships with alternative suppliers

Another important practice for retailers with long lead time products is evaluating the available inventory across their entire network. Knowing where extra inventory is located can help in a pinch if there is a supply chain disruption. A technology solution that can accommodate a retailer’s shift in inventory data is a bonus.

Knowing where extra inventory is located can help in a pinch if there is a supply chain disruption.

An alternative supplier for both domestic and international products can also be a lifesaver in an emergency or when specific areas of the globe are affected by factory closures, shifts in global tariffs, or new regulations. Suppose a particular area of the world is affected by a weather emergency. In this case, it can help a retailer to have an alternative until their usual suppliers can resume operations as normal.

How inventory planning software can help reduce long lead times

Teams that want to minimize lead time but depend on manual tools or processes for inventory management are likely to struggle. In the time it takes to make the necessary manual observations and calculations to get on top of supply and demand, the landscape will have changed, and the information will already be outdated.

The complexity of the modern supply chain necessitates a digital solution in the form of inventory planning software. A robust inventory planning solution allows businesses to:

Enhance supplier collaboration

Companies that lack collaboration with upstream partners can’t identify and mitigate delays, which affects lead times in a major way. More sophisticated inventory planning solutions facilitate seamless collaboration with suppliers. Trading partners can share views of each others’ inventory levels, demand projections, and order status, enhancing the ability of suppliers to align production and delivery schedules with the needs of their retail customers. This visibility shortens lead times and elevates the efficiency of the entire supply chain.

Improve demand forecasting

Harness the power of machine learning to create highly accurate demand forecasts using up-to-date information, like historical sales data and promotional activities. Such accuracy allows retailers to schedule orders in advance with enough lead time to avoid rush orders or the need for expedited shipping, both of which can significantly extend lead times. The best solutions gather new data and adjust forecasts automatically, ensuring businesses can fine-tune stock levels as consumer demand shifts.

Automate replenishment processes

Inventory planning software that supports automation streamlines the replenishment process. An automated solution generates and dispatches purchase orders based on demand forecasts and existing stock levels without manual intervention. This approach ensures that inventory levels are optimally maintained, significantly reducing lead times and bolstering the agility of the business.

Address lead time challenges now and into the future

Upstream and downstream challenges aren’t likely to go anywhere, so long lead time products won’t manage themselves. And while lead time management is critical to long-term success, it’s only one of countless supply chain challenges facing retailers and wholesalers in the global marketplace.

Businesses seeking to gain clarity throughout the chaos need a planning solution capable of managing their diverse and evolving needs. This includes managing relationships with suppliers, reading into the trends and behaviors of consumers, and everything in between. RELEX is designed to do just that, with end-to-end inventory planning functionality to maximize operational efficiency, unparalleled demand forecasting, and an entire suite of solutions that can be configured and tailored to a business’ unique needs.

Gain clarity through the supply chain chaos.

Make smarter plans with RELEX

Written by

Tatiana Iovich

Senior Product Marketing Manager