Logistics errors cost companies up to 8% of annual revenue, often due to one silent culprit — lead time.
Jim Rohn once said, “Time is more valuable than money. You can get more money, but you cannot get more time.” In the world of inventory management, that couldn’t be more true.
If you’re facing high warehousing costs or regular stock shortages, lead time is the metric you must look after. But what is lead time in inventory management? How does this affect your business? We’ll explore all these questions related to lead time in this blog post. Get ready to explore!
What Is Lead Time in Inventory Management?
Lead time in inventory management refers to the time taken by a supplier to deliver a product once it’s ordered by the customer. The time lapse between receiving the order from the customer to delivering the product is what we term as lead time.
People often confuse it with “cycle time.” However, cycle time refers to the time taken by the manufacturer to procure and manufacture the order. It doesn’t include delivery and shipping times, unlike lead time.
Did you wonder how lead time is a crucial inventory management component? From determining inventory levels to estimating demand forecasting and managing orders, lead time affects inventory management in tons of ways.
When your lead times are longer, you can’t have a clear picture of your inventory levels in real-time. This reduced visibility can lead to overstocking and product shortages at crucial business times. Moreover, it also multiplies the carrying charges, thus decreasing profitability.
Components of Lead Time in Inventory Management
Are you wondering about what are the components of lead time in inventory management? Here’s a complete list of its components.
- Preprocessing Time: This initial stage is also known as planning time, wherein the planning and preparation for the business purchase is done. It includes all the crucial preparatory steps right from the need of the purchase to placing the order.
- Processing Time: Processing time refers to the time taken by the supplier to procure or manufacture the goods as mentioned in the order received.
- Waiting Time: It’s the time your company chills while waiting for the products to roll in from the manufacturers.
- Storage Time: So, storage time is when your stuff just be on the shelf before it’s all packed up and sent to the customer. It’s like that book you ordered online, just sitting on your shelf, waiting for you to finally start reading it.
- Transportation Time: Transportation time is like the journey your products take from your warehouse to the customer’s front door.
- Inspection Time: Once your goodies arrive, it’s time for the grand inspection. Customers give things a once-over to see if they match up with what they ordered. It’s like trying on those new shoes you got online – you wanna make sure they fit just right.
How Can You Calculate Lead Time in Inventory Management?
You must have realized the importance of lead time in your game of inventory management by now. The question arises: how can you calculate it?
Here’s a simple formula to help you out:
Lead Time = Reordering Delay + Supply Delay
The two terms “reordering delay” and “supply delay” sounds bombarding, right? Well, they’re pretty simple.
Supply delay refers to the time delay made by the supplier in fulfilling the order placed. You can calculate supply delay by adding supplier cycle time and supplier shipment time. Reordering delay refers to a time delay between the fulfillment of one order and the placing a request for the subsequent one.
Let’s understand the entire thing with an example. Your company, ABC, placed an order for 60 items to the supplier, XYZ. The supplier, XYZ, can manufacture 6 items per day. The items will be delivered within 2 days of being produced. After placing one order, you must wait for one day to ensure that your order is processed.
So, what will be the lead time in this scenario? The “Reordering Delay” in this case is 1 day. Now, let’s calculate the supply delay time.
Supplier cycle time = 1 day for 6 items
Total supplier cycle time for 60 items = (60/6) days = 10 days
Supplier shipment time (in this case) = 2 days after the items are produced.
So, supply delay time = Total supplier cycle time + Supplier shipment time = (10+2) days = 12 days
Using the formula of lead time,
Lead Time = Reordering Delay + Supply Delay
= (1 + 12) days
= 13 days
Factors That Affect Lead Time in Inventory Management
Below listed are the factors that affect lead times in inventory management. Let’s explore how each one of them affects lead time.
1. Lengthy Process
The involvement of unnecessary processes and movements in the supply chain can increase lead time. Thus, both suppliers and business managers should be concerned about optimizing the processes at each step to avoid cumbersome processes that eat up time.
2. Suppliers Policy
The lead times, in most cases, differ based on the supplier you choose and his policies. Moreover, the lead time further increased with the increase in the number of suppliers involved in the supply chain. Thus, a short supply chain with fewer suppliers means short lead times.
3. Delay in Shipment
Shipment delays may occur due to many expected and unexpected reasons, such as sudden weather changes, etc. These delays also increase the lead time. For example: The recent COVID-19 pandemic and its protocols affected the logistics industry a lot by delaying shipments.
4. Inventory Mismanagement
When you don’t manage your inventory well, you will not know what, when, and how much of the inventories you need to order. Thus, to reduce lead time, you must manage your inventory efficiently and work towards procuring orders from within the business in case of stockouts.
5. External Factors
Sometimes, other factors, such as communication between suppliers and managers, delay in order processing, and constrained capacity, also affect lead times.
Strategies to Reduce Lead Time in Inventory Management
Long lead times slow operations, increase costs, and reduce customer satisfaction. Here are five proven strategies to reduce lead time and boost supply chain performance.
1. Choose Your Suppliers and Vendors Wisely
While choosing your suppliers and vendors, you should prefer local ones as they can deliver the products more efficiently within a short span. Also, have less number of suppliers in the supply chain and get rid of the inefficient and unreliable ones immediately.
Moreover, also work on strengthening your relationships with suppliers. This way, you can encourage them to be efficient and deliver the required materials on time.
2. Inventory and Supply Chain Management Is the Key
When you manage your inventory and supply chain efficiently and effectively, you can not just optimize inventory levels but also streamline the supply chain, thus ensuring timely ordering. This way, you can respond to customer’s demands proactively, thus minimizing delays and lead times.
3. Revisit Production Process and Eliminate Inefficiencies
When you revisit production processes, you look into the processes and analyze them more effectively. This optimizes the production processes at various stages. Moreover, it also helps you identify potential bottlenecks, thus fastening up the production processes and reducing lead times.
4. Involve Suppliers While Demand Forecasting
By involving suppliers in the demand forecasting, you can have a clear picture of their production and supply capabilities. This helps you manage and align your inventory to their place and the consumer’s demands. When both parties are aware of the production timelines and other such crucial metrics, it leads to better inventory management, thus reducing the chances of potential disruptions in the supply chain.
5. Improve Communication
Lack of communication in a professional relationship is the worst nightmare for any business manager. It’s why you should have efficient and clear communication channels between suppliers, vendors, and the company, thus facilitating the smooth flow of information and goods.
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Wrapping Up
Lead time isn’t just another KPI — it’s the heartbeat of inventory management. By tracking, calculating, and reducing it, you can optimize stock levels, minimize costs, and meet customer demands faster.
If you’re ready to reduce your lead time and boost operational efficiency, explore QodeNEXT’s smart inventory and supply chain management solutions today.
FAQs: What is Lead Time in Inventory Management
1. What is lead time in inventory management?
The time lapse between receiving the order from the customer to delivering the product is what we term as lead time.
2. What are the components of lead time?
The components of lead time are Preprocessing time, Processing time, Waiting time, Storage time, Transportation time, and inspection time.
3. What is the formula to calculate lead time in inventory management?
Here’s the formula to calculate lead time in inventory management:
Lead Time = Reordering Delay + Supply Delay
4. List the factors that affect lead times.
Here’s a list of factors that affect lead times in inventory management:
- Lengthy Process
- Suppliers Policy
- Delay in Shipment
- Inventory Mismanagement
- Stockouts
- External Factors
5. List some strategies to reduce lead time in inventory management.
Below listed are a few strategies to reduce lead times in inventory management:
- Choose your suppliers wisely
- Inventory and supply chain management is the key
- Revisit the production process and eliminate inefficiencies
- Involve suppliers while demand forecasting
- Improve communication
6. What impact does variability in lead time have related to inventory planning?
Variability in lead time complicates planning — more buffer stock (safety stock) is required, your reorder point changes, and your forecast errors increase.
7. Lead time vs Cycle time - What’s the difference?
Cycle time is a measure of a single internal process (eg manufacturing), whereas lead time is a measure of the entire end-to-end period (order to delivery).
8. What can cause lead times to increase unexpectedly?
Typical reasons: supplier delays, shipping or customs hold-ups, internal bottlenecks of approval, raw material shortages, unexpected surge in demand.
9. What are the types of lead time?
Lead times can be of many types such as production lead time, procurement lead time, order lead time, transport/shipping lead time and cyclic/total lead time.
10. In what ways can technology assist (ERP / inventory software) to manage lead time?
It can automate monitoring, send warnings when lead times are out of line, feed data into reorder triggers, highlight slow suppliers, and even help forecast delays.
