Why SME Business head must continously focus on reducing Lead-Time?

From customer's perspective, Lead time is the time taken between customer placed the order for product/service and the time the customer received the product/service.

This lead time may be further broken down into supply lead time, manufacturing lead time, distribution lead time and so on. Those classifications are internal to the organization, and the business head must focus on to reduce the overall lead time continuously.

Why lead time reduction is an essential focus for the business/business head?

Lead time reduction is important from four perspectives.

1.Working capital & Finance perspective

2.Triggering sales & operations teams towards growth performance

3.Operational Efficiency perspective

4. Customer's perspective

Let us understand from each perspective.

1.Working capital & finance perspective:

When the product/service order fulfillment lead time is more, the expenses incurred to cover the product/service till getting payment from the customer will also be more. The business gets the cash only when the product/service is sold to a customer and converted as cash.

For example, if the lead time is six months, business will get the cash only after six months. Till such time, the business has to fund for all the expenses like salary, material procurement, and other overheads, etc .that is working capital is required for six months..(Pl ignore, advance payment, credit times, payables, receivables, etc. as those are all tactic arrangements by the business)

If the business team reduces the lead time by three months, working capital required only to fund three months expenses.

Hence, if you have high working capital, one of the causes and solution approach would be a LEAD-TIME reduction of your order fulfillment.

2.Triggering sales & operations teams towards growth performance:

Typically entire organizations' speed depends on the PULL. For example, If lead time is six months and the order execution capability of 6 months, say one crore, then the organization can make only two cr as sales turnover annually. Based on the execution capability or capacity of the organization, the sales and marketing function also behaves and operates. Once the lead time is reduced by 50 %, say by three months, then organization capability is also increased to 4 cr as sales turnover. The point is when Operations engine pulls more, the other parts of the organization also pull more from the market or customer.

The business head responsibility is to understand this behavior and must focus on lead time reduction. If your organization sales turnover is stagnant, one of the reasons could be high lead time and complacent in the organization.

3.Operational Efficiency Improvement

When the lead time is high compared to actual value addition time, it means, your product/ service is held up in the value chain as waiting or delay. This results in accumulation of inventory in the form of WIP, which sometimes leads to rejections/ rework, making the communication complex, storage, handling, manpower deployment and so on.

Also, your strategic decision on supply chain leads to high lead time in getting the raw materials and high lead time in reaching the customer .Typically when the lead time is high; it brings all the inefficiency or wastes in the system. When the lead time is low, it brings flexibility to your production system as you can move from " Build to stock" to "Build to order."Also, the change in your production system will reduce your inventory and its derivative wastes in the system.

If you are struggling with low efficiency in your operations, one of the causes could be high lead time

4.From customer's perspective :

In today's fast-moving lifestyle, the customer does not want to wait, and he is willing to pay more for quick delivery than negotiating and followup with your team on delivery dates. Less the lead time, more customer's satisfaction and there is possibilities of further business partnership.If the lead time is high and non-negotiable, there is a possibility of your customer move to the competitor.

In essence, as a business head, your continuous focus must be on reducing the lead-time either in supply chain or operations or distribution.

This focus will give tremendous benefits in terms

1.Capability to increase sales turnover

2.Reducing the cost of the product

3.Reducing the working capital