What is Lead Time?

Last Updated September 27, 2021

Managing lead time is an important aspect of efficient inventory management. The ever-changing world of online business and retail transforms the face of shopping and brings with it high customer expectations. Customers expect a minimum delay in orders, a fast delivery date, and flawless shipping from end to end. To meet these expectations, online retailers have to create a smooth supply chain that has an optimum lead time, where customers are fully satisfied with their order period and delivery and return services. Online businesses have to make sure that they are manufacturing and sending the right products at the right time and in the right amount. One of the most important metrics in e-commerce retail is that lead time plays a crucial role in planning orders, managing inventory, and ultimately resulting in happy customers.Here is everything you need to know about the lead time, from the basic lead time definition to the disastrous outcomes of poor and long lead time procedures. Stay tuned to learn more.

In this guide, we’ll help you understand:

  1. Definition: What Exactly is Lead Time?
  2. Lead Time Basics: How to Calculate
  3. Lead Time = Delivery Date – Order Date
  4. Lead Time vs. Cycle Time: Basic Differences
  5. How Lead Time Affects Inventory, Manufacturing & Supply Chains
  6. How to Effectively Manage & Reduce Lead Time

Definition: What Exactly is Lead Time?

When looking into the lead time meaning it is essential to go about it in context. While in basic definition, it refers to the amount of time between process initiation and process completion, in the e-commerce world, it means so much more than that. Lead time in inventory management is a crucial aspect of the online business, affecting your entire supply chain, from manufacturing to customer delivery. It can be defined as the time between a confirmed and placed customer order and the time it has been scheduled to be delivered. Although these metrics may vary based on the product, as well as the customer, lead time in the supply chain is one of the key points in addressing issues such as low productivity, low revenue and profits, inefficient business management, and wastage of resources. The longer your lead time is, the more time you should be spending on finding ways to reduce it and optimize your strategy.

Lead Time Basics: How to Calculate

Lead time is one of the most significant factors to weigh in when forecasting your stock and inventory. Although the lead time calculator formula you choose to use usually depends on the specific context of your product or customer base, it is generally calculated as the amount of time between the purchase of an order to the time the product reaches the warehouse. Needless to say that the more suppliers you have, the longer your lead time will be. Online businesses may turn to the following formula for basic lead time calculation:

Lead Time = Delivery Date – Order Date

To efficiently calculate your average lead time, you can also use a different formula to determine the supply delay, determine the reorder delay and sum up these two metrics to achieve your lead time numbers.

Many different types of lead time can be calculated based on a variety of metrics. For instance, while customer lead time refers to the amount of time between order confirmation and fulfillment, material lead time corresponds to the amount it takes from placing an order to receiving it. Production lead time is often known as the time between building and shipping a product. In contrast, cumulative lead time considers the time it would take to order the entire materials needed to manufacture and deliver the purchased product. This can also be defined as the sum of material and factory lead time.

To efficiently calculate your average lead time, you need to determine the supply delay, determine the reorder delay, and sum up these two metrics to achieve your lead time numbers.

Lead Time vs. Cycle Time: Basic Differences

While lead time, in the simplest definition, is the total time it takes from receiving an order to delivering it, cycle time refers to the period from the beginning to the end of the process conducted within the company. In other words, when comparing lead time vs. cycle time, it is important to note that cycle time focuses on measuring the internal duration of the order.

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How Lead Time Affects Inventory, Manufacturing & Supply Chains

In order to fulfill orders during the period of any possible delay or dodge the risk of losing customers and revenue, an online business must have enough stock on hand in case its supplier is unable to deliver the order on time. Longer lead times lead to more stock a company has to keep in their inventory, resulting in higher pay in storage. This may also cause a negative impact on agility and adaptability, ultimately affecting the quality of customer service. Introducing improved or new products to your business may become herder with more resources dedicated to purchasing large amounts of the same product.

Numerous factors can affect your lead times as an online business. While the e-commerce world seems to be filled with joyful customers that receive their order on the same day, there are, in fact, undeniable factors that may cause the lead time to last up to several weeks. Shipping and freight services have improved drastically over the past few years. However, these are not the only factors that majorly affect lead time. Lead time for delivery may remain under the influence of various factors, including dalliance on the approval of the order, not enough material on the suppliers’ end, standard checks at customs, and so on.

It is also important to know that your lead time is bound to increase when you first initiate your business due to the outsourced parts of your supply chain. Nonetheless, once your suppliers get accustomed to your products and the nature of your orders, your lead time will organically reduce, and the entire process will shift to speed in no time.

How to Effectively Manage & Reduce Lead Time

Lead time reduction is an essential part of high-performing warehouse management and high-quality customer service. One of the first things you need to do when managing lead time is to fully comprehend your supply chain process from A to Z. Documenting your supply chain journey from end-to-end and identifying all the key checkpoints along the way intimately can help you determine the obstacles where you can come across with delays and unexpected waiting spans. It is also recommended to always plan for the worst-case scenario, even when the sky is clear.There is always the possibility of your supplier delaying your products due to the holiday season rush. Here are a few common tips that will help you reduce your lead time both in the short and long term:

Cut back on non-value-added activity. To determine the non-value-added activity that increases your lead time, make sure to perform a value stream mapping and prepare a list of prolonging activities before eliminating the ones your business can survive without. Maintaining the exercises that positively impact your overall business quality is key.

Consider changing shipping methods. Your delivery method says a lot about you, having an obvious impact on your shipment frequency and speed. While most suppliers prefer slower shipment methods to cut back on costs, this may not be ideal for your lead time metrics. You can gradually reduce it by transitioning to a more flexible shipment method and saving yourself time and money in the long run.

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Try vertical integration. Vertical integration is the ability to manufacture, assemble, and source internally. If this is a possibility for you, opt for a vertical integration system that involves combining the entire supply and business process, therefore reducing the transportation time of certain components needed for a particular order.

Search for local resources. Check to see if the material you import is available locally, cutting back on time for waiting for these outsourced raw materials to be delivered from international suppliers. This may have quite an impressive impact on your lead time since the goods will be transported over much shorter distances.

Increase the frequency and decrease the volume of your orders. Order small amounts that take less time to ship when purchasing material from your supplier. This will make your stock replenished more consistently and frequently, instead of ordering a large amount of inventory at a time and waiting for the entire batch to be delivered for a long time.

Automate your inventory management process. Automating your inventory management and switching to an automatic IMS will drastically speed up your time to market, not to mention creating a positive impact on your lead time figures. With the IMS tools Logiwa has to offer, you too can reduce the time it takes between receiving and delivering an order, therefore making ground for a loyal, satisfied, and overall happy customer base.

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