What Is Purchase Order Lead Time? Definition and How It ...

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What Is a Purchase Order Lead Time (POLT)?

The term purchase order lead time (POLT) refers to the number of days it takes between the time that a company orders production inputs and the time those items arrive at the manufacturing plant. Put simply, a purchase order lead time is the estimated time it takes to receive an order after it is placed. POLTs vary between companies and industries, so no two experience the same time. This means the timeframe depends on many factors, including the types of goods required and the time of year.

Key Takeaways

• Purchase order lead time is the number of days from when a company places an order for supplies to when those items arrive.
• The POLT depends on the types of supplies ordered, their relative abundance or scarcity, where the suppliers are located, and even the time of year.
• Steps in the POLT process can include order confirmation, shipping notice, and payment.
• Manufacturers must carefully plan purchase order lead times when planning a manufacturing run.
• Companies can reduce their order times by increasing the number of orders, changing suppliers, and automating the order process.

Understanding Purchase Order Lead Times (POLTs)

The purchase order lead time is how long it takes for an order to be fulfilled&#;from the time the order is placed until the estimated date of receipt. So if a company places an order for supplies on May 1 and it's expected to be delivered on May 10, the POLT for the supplies is nine days. This timeframe is heavily influenced by a number of factors, including the types of goods required by the company, the availability of materials, where they come from, the location of the suppliers, and even the time of year.

The POLT includes a number of different steps, including the:

• Confirmation of the order
• Availability of the goods
• Order placement
• Acknowledgment of the order
• Shipping notice
• Receipt of the goods
• Invoicing
• Payment

Companies must carefully plan purchase order lead times when planning a manufacturing run because if production inputs do not arrive on schedule, manufacturing will be delayed, costing the company money in lost sales, idle worker time, and lower factory overhead absorption. On the other hand, if inputs arrive too early, the company could incur additional inventory storage costs.

For this reason, managers need to plan as precisely as possible when they need to order the materials needed, lest they incur additional overhead. If they have a trusted supply chain, this should be one of the first items added to a production and/or staffing calendar.

There are ways companies can reduce the number of days in a POLT:

• Increasing the number of orders. This is a better option compared to putting in one or two large orders. By doing so, companies can save both time and money. This can also ensure they don't have too much of a certain supply while maintaining enough stock to keep fulfilling orders.
• Changing suppliers. Using local or domestic suppliers over international ones may help cut down on lead times, which, again, can save time and money.
• Automating the order process. By moving to a system that automatically places and fulfills orders, companies can free up manpower for other tasks, and personnel can have more time to do their jobs. Automation also helps cut back on any possibility of error when it comes to the order placement process.

Manufacturers must be aware of the possibility of a delay if inputs are ordered from a faraway location.

Special Considerations

A company can set up a two-bin inventory control system, which can largely automate the reordering process for small or low-value items or materials. For more important inputs, a company must keep in mind not only the shipment time but the order processing time as well. For instance:

• If supplies are ordered on a Friday afternoon, the order may not be received until Monday, which means a loss of two days
• If raw materials are in scarce supply, a manufacturer may not receive the desired quantity, and they may not arrive on time if the supplier has to source the materials from somewhere else before it ships to the customer

If there is high seasonal demand for a particular raw material, that may affect whether supplies are received in a timely fashion. Even though a producer may want to avoid unnecessary storage costs, they may choose to keep a buffer supply on hand to protect against shipment delays.

The visibility of real-time inventory levels of raw materials is enabled by online software connections between manufacturers and suppliers who care about supply chain logistics. The more the buyer communicates its forward needs by providing demand forecasts to the seller, the more accurate the order lead times. Many manufacturers may also employ a production strategy called Just-in-Time (JIT) manufacturing, This process aligns orders with corporate production schedules, thereby reducing wait times and waste.

What is an outsourcing decision?

An outsourcing decision is when a company chooses to hire external organizations or professionals to manage specific business tasks or services, instead of handling them internally.

This strategic decision is often driven by the desire to reduce costs, access specialized expertise, focus on core business functions, and improve efficiency.

It involves evaluating potential benefits and risks, considering the impact on current operations, and carefully selecting the right outsourcing partner.

This approach can significantly affect a company's operational dynamics and competitiveness.

Why outsourcing decisions are important?

Outsourcing decisions are crucial for businesses because they can lead to significant cost savings, access to specialized skills and technology, increased efficiency, and the ability to focus on core business functions.

Making the right outsourcing decision can also provide a competitive advantage by allowing companies to adapt quickly to market changes and scale operations effectively.

However, it requires careful assessment of potential risks and benefits, understanding the impact on company culture and employee morale, and ensuring alignment with the company's overall strategic goals.

Outsourcing decision Matrix for you to decide better

Factors

Consideration

Outsource

Keep In-House

Cost

Is it cheaper to outsource?

Yes

No

Expertise

Do in-house teams have the required skills?

No

Yes

Focus on Core Business

Does the task align with core business activities?

No

Yes

Control

Is direct control over the task crucial?

No

Yes

Quality

Can the outsourced provider guarantee quality?

Yes

No

Scalability

Is there a need to scale the task quickly?

Yes

No

Risk Management

Can risks be effectively managed externally?

Yes

No

Technology

Does the task require specialized technology?

Yes

No

What are the factors influencing outsourcing decision?

Outsourcing is a strategic decision that can significantly impact a business's efficiency and success. Understanding the key factors involved is crucial for making informed decisions.

This section explores the essential considerations in the outsourcing process.

Let&#;s take a look at some of the factors to consider for taking outsourcing decisions for your business.

1) Cost Savings

When you talk in pure business terms, outsourcing needs to improve your business bottom lines through reduced operational costs. If you don&#;t see this happening anywhere in the near future, chances are that you&#;ll end up spending more than you end up saving.

You don&#;t need to be an expert analyst to figure out where you&#;re heading. All you&#;ve to see is whether outsourcing will help you reduce a significant amount of your capital in hiring employee and equipment. At the same time, you will also need to maintain a balance between the quality and quantity of the services provided by the outsourced employees/firm.

For instance, if you outsource accounting, see if doing it yourself costs more than outsourcing.

2) Pricing

We already discussed how cost-cuttings by hiring talent in a low price tag is one of the most common factors why companies outsource. You&#;ll get several vendors offering their resources at a competitive price.

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However, instead of going for the cheapest vendor, compare and find out what are you going to get from other vendors as well.

For instance, some vendors will also offer customer support at no extra charge, which is a great deal in itself. Just remember that although price is an important factor, it should not be the ONLY factor that helps you zero-in on a vendor.

3) The Resources and Technology

Technology and resources are two considerations that are essential when you choose to outsource.

Ask the vendor about the tools and technologies they are going to use for your project and how capable are they of handling all your outsourcing needs?

What about the resources? Are they well trained for the assignments?

Does the vendor have an office with up-to-date systems and can handle the most rigorous of the outsourcing functions?

Answers to questions like these will lead the way to select the apt vendor who has the best resources and updated technology for seamless handling of your business functions.

4) The Ability To Meet Deadlines

Timeliness in outsourcing is as important as the costs. For instance, if a vendor fails to toe the deadlines, it can lead to major bottlenecks. That alone will nullify any cost-saving benefits that you had anticipated while hiring them.

You need to ensure that the vendor adheres to the promised quality and timeliness. One of the ways to do this is by making all your queries beforehand.

If you find that the vendor has little quality control measures or does not have any backup plan should they miss a deadline, it is better not to hire them in the first place.

5) Minimal Supervision

When you hire an outsourcing vendor to work on your business requirements, it&#;s a given that they are going to take care of everything from the scratch.

There should be no room for sloppy or shoddy work and they should be able to produce the results. 

Choosing a responsible vendor who will be in charge of the projects is a must-have so that you only need to supervise them minimally and let them take it from there.

This will give you more time to focus on your core business functionalities.

6) Limit The Liabilities

More often than not, there are certain functional areas that can build up liabilities for a business. This eats up time and money, which can be spent elsewhere.

You can cleverly outsource certain functions to reduce the liabilities an extent.

7) Trustworthiness

Before you sign on the dotted line, do make it a point to visit the vendor&#;s site. Apart from this, also research on the internet to find more about the firm, the infrastructure, safety practices and the team that works there.

This will help you assess the reliability of the service providers. If you have a reference who&#;ve worked with a vendor in the past, you can also ask them about the firm. This takes us to the next point.

8) Who&#;ll Lead The Team

You can&#;t just have blind faith in the outsourcing team even if you&#;re saving significantly by hiring them. Find out all that you can, including the team members who&#;ll be working on the projects and who&#;ll lead that team.

Learning these facts upfront will save you from several agonies at a later stage. Moreover, when you know that your business functions are in able hands, you&#;ll be at peace.

9) The Service Level Agreement

The SLA (Service Level Agreement) is one of the most crucial documents when we talk about outsourcing partnerships. At the time of creating the document, make it a point to ensure that every single detail is written clearly.

This will help you avoid you any kind of confusion or ambiguity especially about the quality of the services you&#;ll be getting.

It also makes sense to hire a lawyer especially to manage your outsourcing endeavor so that you don&#;t end up in any legal trouble.

10) Communication

Communication is the key whether you&#;re working onshore or with an offshore team. The vendors should be able to handle your queries and promptly reply without making you wait indefinitely.

Their communication skills need to be spot on without any space for cultural or other communication barriers. This ensures that they have clearly understood your requirements and can address any issue that may crop up.

10 Outsourcing Tips to Grow Your business Successfully.  

During a downturn in the economy when the demands for products and services touch the lowest level and cost is sky rocketing, outsourcing acts like a savior. Majority of the companies look for cost-effective solutions to run the business operations with effectiveness and maximizing the performance of an organization during the period of recession.

The cost of labor can take a toll on the profits of a business. In the tough times your definitive choice is outsourcing to increase your productivity at the same time you will end up saving substantial cost. 

When you look for an outsourcing partner, you get a grasp on the procedures and approaches that can make your business run in a seamless manner.

For instance, establishing positive relationship with the customers requires strategic skills that can become effective with the assistance of a genuine outsourcing services provider.

When you outsource services to a company which is located offshore, the target is to access better workforce that can handle your tasks with a different approach and is identified as a turning point in business.

There are some businesses that try to do everything on their own without realizing that it is a counter-productive step.

When you are trying to step into a phase of growth in business, it is necessary to envisage the big picture rather than getting into the realm of trivial tasks and taking proper steps can make all the difference.

Have a glimpse of these outsourcing tips that can get you started in your business.

Creating an effective plan:

There are lot of mundane work which you need to carry out on daily basis which takes maximum amount of time. As soon as you think of spending time on routine non productive work, think of having a virtual assistant right away. It is good to focus on those areas in your business which will get you maximum growth. I

t is more like filling the gaps in business with the best tactics and focusing areas that require attention of experts. For instance, you might want to bring a radical change in the infrastructure or anticipate a major change in the output or manage the operational costs to reduce the outflow of cash.

Thus, you have to create a plan for the services that you require before having a virtual assistant right away.

Understanding the basic objective of outsourcing :

It is not enough to outsource simply because it can help you save costs. It is true that outsourcing is cost-effective but you have to know the exact reason for which you require the services of an outsourcing company.

An organization might want to consider the option of outsourcing to gain a competitive edge while another business might want to reduce the overhead cost or generate more revenue. In short, a business must focus on the reason and benefits of outsourcing which can have a positive impact on the business.

Identifying the reasons for which outsourcing is effective : You have to identify and find the causes for which outsourcing can be an effective option for the services that you need to obtain from a company that has better skills to handle those tasks.

While a lot has been heard and said about outsourcing and its benefits, it is much like a matchmaking company for organizations that want to obtain services that resonate with the requirements of the business.

Make sure that the company you have hired has understood your objective and the benefits of hiring come into effect in the real sense.

Getting quotes from different service providers :

If you want to get the best services, you have to talk to a few outsourcing companies to find out the service that they offer and whether they match with your requirements.

Finding a good vendor can be a challenging task as there is a host of companies that offer these services and you need to find one that can handle the tasks that you want.

There are multiple companies and freelance job sites like www.upwork.com , www.guru.com etc. You may also want to decide on whether to outsource to an agency vs freelancer.

Knowing the points of contact :

It is important to find out from known resources about the ways in which you have to search for reliable outsourcing companies.

However, you can also prefer to carry out an independent research although following a set of guidelines can provide you with the opportunity to get the best when you are looking for outsourcing services.

Getting referrals and recommendations from those people that have availed these services can also work in your favor.

Creating deadlines and completion of work:

When it comes to outsourcing, you have to create a set of deadlines for completion of projects.

Although reliable service providers offer a time frame for delivering the services, there is no dearth of companies that fail to meet the expectations of their clients.

It is good to steer clear of such companies and associate with those organizations that have the reputation of offering the best to the clients.

Reviewing the outsourcing contract:

As soon as you get a copy of the outsourcing contract, you have to read in between the lines and try to get a grasp of the points that are mentioned therein.

However, if you want better conviction in work, the best option is get the review done by a legal expert. A professional legal counsel has the ability to locate the discrepancies in the terms of agreement and can offer you advice against it to avoid landing in a pile of mess later.

Unless you read the document of agreement carefully, you might just miss out on some of the most important points that are essential before you get started with outsourcing services.

Hiring a legal counsel is good to get clarifications about the points that have been mentioned in the contract and creates an avenue for you to ask questions even when there is a slightest speck of suspicion.

Communication and review of work:

Many of you might just think that hiring an outsourcing company can produce miraculous results although you have to review the flip side at first.

When you avail the services of an outsourcing company, it is necessary to review the progress of work regularly. 

Communicating with the outsourcing company is essential to know where you stand or whether the benefits have started showing for which you have considered availing services from the company.

Taking informed decisions:

It is good not to base your decisions on the cost-effectiveness of the services. When you hire an outsourcing company, it is necessary to find out whether you can get a balance of quality work and affordable services.

In short, you have to find out whether the services that you intend to hire will offer value to your business and provide you with an opportunity to outbid your competitors.

For this, you have to stay away from those service providers that quote extremely low prices which either implies that the company has not understood the nature of the work that they need to deliver or do not have the know how to start processing the ideas.

Transparent ideas and work process:

While hiring an outsourcing company, do not hesitate to ask questions to the service providers that can be related to any aspect of outsourcing or specific queries about the project that you intend to assign to the company.

In addition to this, you have to be clear about the hours of working when you hire a company that belongs to a different time zone.

For some projects, the time zone of the outsourcing company can extend the working hours of your business leading to completion of projects ahead of time.

Things to remember

Even if you have a manual for the working process, you can try to find out whether your virtual assistant can provide effective services in real time.

The best thing is to begin with a small project when you are hiring the services of an outsourcing partner for the first time that will allow you to find out the style of work that the company follows and the ability of the workforce to complete the task within the desired time frame.&#;

The next thing that you have to keep in mind is that hiring the services of an outsourcing company which is conversant with the recent tools and technologies that are implemented in this field makes sense.

After all, you will never want to stay behind your competitors in a bid to hire cost-effective services from your outsourcing partner.

Reviewing the benefits of outsourcing will not help you much rather you have to make serious efforts to understand what outsourcing is all about and whether your business will benefit from the services or not.

Furthermore, you can communicate with the outsourcing company and make time for meetings that can be conducted on Skype at least for the first few months.

It is important for the outsourcing company to know that you are aware of the services and the level of quality that a reliable company offers to the clients and expect to get the best from them.

For small businesses the risks of outsourcing has to be studied at first when the work is delegated to another company. Therefore, justifying the credibility of the service provider is necessary to get services in the hour of need.

Setting a realistic budget is also important when you hire the services from a company which is located offshore as the time frame is likely to extend beyond the schedule.

Terminating the contract at the beginning can save you time and money rather than finding out later that the service provider has not delivered the quality of work that would have benefited your business.

Conclusion

Making a well-informed outsourcing decision requires a thorough evaluation of these factors.

By carefully considering each aspect, businesses can leverage outsourcing to enhance efficiency, access expertise, and stay competitive in their industry. To read more outsourcing articles follow us. 

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