With the rise of services promising next-delivery, customers expect their orders to arrive more quickly than ever. When your business is managing its inventory to meet customer demand, you’ll need to work out purchase order lead time to factor in raw materials and shipping delays. What is purchase order lead time, and how can you make your supply chain more efficient? Here’s how to get started.
Purchase order lead time explained
Purchase order lead time, or POLT for short, measures the number of days taken for items to arrive after an order is placed. It’s most frequently used in manufacturing to help project managers keep up with production needs by keeping track of the shipping times needed for various parts. For example, imagine that Company ABC places an order for supplies on April 1. The supplies are delivered to the company on April 15, meaning the POLT for these supplies is 14 days.
Factors influencing POLT
The purchase order lead time will vary widely not only between industries but within companies. Lead times are dependent on factors including the types of materials ordered, their availability, the time of year, and the distances they must travel. During a seasonal rush, it may take longer for goods and services to arrive.
Here are a few additional reasons why POLT might be higher than usual:
Raw materials are in short supply due to increased demand
Your order must travel a long distance
The supply chain is disrupted due to illness or disaster
Customers rules have changed, leading to more red tape at ports
How to estimate POLT
The purchase order lead time can have a direct impact on your business’s inventory levels and production capabilities. This is why it’s vital to work POLT into your planning stages of inventory management. There are several steps involved with the purchase order lead time:
Submission of purchase order
Confirmation of purchase order
Order placement and acknowledgement
Notice that goods have been shipped
Receipt of goods ordered
Invoicing and payment processing
It’s possible to streamline this process with automated software and a well-connected supply chain, provided nothing else goes wrong. On the other hand, if you receive your goods too early, you might not have adequate storage for the inventory.
You can use a formula to calculate lead time that factors in all the steps mentioned above.
POLT = pre-processing time + processing time + post-processing time
Breaking it down into stages lets you estimate your purchase order lead time more accurately.
How to reduce POLT
Ideally, you’ll receive your goods swiftly after placing an order. If you find your lead times are getting longer and longer, there are several options for reducing POLT.
Purchase order financing ensures the supplier is paid by a third-party with a loan. This can speed up processing times with faster, more reliable payment to your suppliers. You might want to consider purchase order financing if you have difficulty at the payment stage, slowing down processing times.
Rather than placing one large order, try spreading out your orders into a series of smaller, more frequent purchase orders. This should help ensure a steady stream of supplies, with a reduced lead time.
Automate your purchase order process using software for inventory management. These types of systems automatically monitor stock levels, placing and fulfilling orders before you run out.
Finally, you might need to consider changing suppliers. When a supplier can’t deliver in a timely manner, you need to shop around for a new manufacturer that can cut down on lead times. Look for local suppliers whenever possible to cut down on logistical complexities and global shipping delays.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.