With any discussion of inventory management arises, sooner or later the subject of lead time will come up. What exactly is meant by lead time in inventory management? The term usually refers to the amount of time that passes between when a purchase order to replenish items is placed and when it is received in the warehouse Lead times can vary considerably between suppliers, with the more involved in the supply chain, the longer the lead time will probably be. Simply put, it’s the amount of time that elapses from the start to finish of a given process in a business, manufacturing facility, and so one.
Why is lead time in inventory important? Remember the old saying about “time is money”? Lead time is a major factor in customer satisfaction, because if customer lead time is shorter than material lead times, production lead times, or cumulative lead times, it will end up with the holding of inventory at some point in the supply chain. Struggling to deliver purchases on schedule in the right amounts can cause problems with a business’s workflow, leaving them with only their existing stock on hand for fulfilling orders, which may prove insufficient to meet customer demands. This will in turn result in delays and dissatisfied customers, who may choose to take their future business elsewhere.
Furthermore, if lead times are consistently too long, this will raise storage costs as businesses find they need higher inventory levels to be prepared for meeting demands.
If you find that your inventory is lagging behind in fulfilling orders and maintaining a solid order fulfillment schedule a lead time analysis should be performed to determine the position of lead time within inventory. This can be dome by dividing the product data base by lead time length or duration.
This in turn requires performing lead time calculations, such as discussed further below.
As discussed earlier, the term lead time meaning is the amount opf time that passes between when an order is placed and when it is received by a warehouse or other distribution center.
The term is used in a variety of fields, including manufacturing, supply chain management, supplier management, material requirement planning (MRP), and Enterprise Requirement Planning (ERP), as well as in software development and more.
There are lead time calculator formulas online and elsewhere, but they’re all pretty basic in that you’ll need to know up front just how long supply delays as well as reordering delays normally take in order to accurately calculate the lead times.
To meet a lead time definition there should be a measurable amount of time between order and fulfillment tasks, in order to be able to determine whether lead times are within an acceptable range or whether further analysis needs to be performed to get it back on track.
As a rule, one can use this lead time formula to calculate lead time: Lead time is the sum of the supply/ shipment delay and the reordering delay. Clearly, lead time directly impacts your inventory levels, so it’s crucial to understand and track it at all levels.
Here’s a basic lead time in inventory management formula:
- Determine the supply delay
- Determine the reordering delay
- The sum is supply delay plus reordering delays
Finding a lead time formula Excel (specific) is fairly easy:
- Enter the start (order) date
- In another cell, enter the delay (in this example, the lead time for delivery)
- Create a formula to add the days to the date (e.g.: A1 +A2)
- The date can be formatted as a result, using either a Number group or Format Cells dialog box
Using a lead time calculator Excel is fairly straightforward, as mentioned above. It can be used to calculate anticipated payment or delivery dates.
What is lead time in business?
What are the different types of lead time based on the industry? Lead times differ based on the customer or products, but for manufacturing purposes, it usually includes:
- Materials lead time
- Customers lead time
- Production or manufacturing lead time
- Cumulative lead time
Lead time in manufacturing is important due to the need to be able to fulfill orders within the supply chain, especially if there are other obstacles or other factors that could increase lead time, some of which may be outside of a company’s control, as with recent shipping and other supply chain interruptions. Components of lead time in manufacturing generally are comprised of:
- Pre-processing time – this is the time needed for receiving and understanding a request as well as creating a Purchase Order.
- Processing time – this is commonly known as the time needed to produce or procure the item ordered.
- Waiting time – this is the amount of time spent with the item lined up in a queue waiting for production or arrival.
As you can see, keeping an eye on your delivery lead time is essential to maintaining a high level of customer satisfaction.
What is lead time in inventory management? Lead time affects the amount of stock held at any time within a company. When trying to reduce lead times, you need to first understand your supply chain processes.
One lead time example is how long it takes for a manufacturer to use the raw materials available to create a finished product for sale, such as if you order a custom auto and are told to expect delivery in two to six weeks.
If you’re already an Ordoro customer, you already know what a great difference it can make having top-of-the-line inventory software helping you take full charge of inventory and all other aspects of ecommerce, including lead time in shipping and lead time in inventory management.
It can’t be emphasized too much about the importance of lead time reduction in inventory management.
What do we mean by lead time reduction?
Lead time reduction is essentially the identification and removal of unnecessary tasks that waste time and employee effort as well as the shortening of the extended waiting time for performing various processes. Businesses should always be on the lookout for opportunities to reduce lead time to focus on improvement actions that enhance processing outcomes. Keep in mind that lead time reduction overall is an important goal if you want to be successful in providing top-notch customer service and gaining repeat business.
While lead times will vary from industry to industry, they should still be relatively short as well as consistent. If you’re not receiving your shipments as soon as you should, you will be unable to serve your customers and you’ll lose revenue, including that from future orders, in the process. Some more benefits of lead time reduction include:
- The ability to outpace the competition with faster output
- Flexibility to accommodate rapid shifts in markets
- Meeting customer deadlines easily and consistently
- Faster stock replenishment to avoid potential stock-outs, lost customers, and lost sakes
- Increasing cash flow due to increased order fulfillment
The takeaway: having a relatively short lead-time can mean that you have your order processing and fulfillment operations in good order. As a result, you’ll have happier customers and increased sales as your business grows and thrives. Your brand will win the respect and the confidence of customers and suppliers alike.
Using inventory management software by Ordoro – part of the top ecommerce management systems available today – is a great way to take control of inventory, shipping, lead time, and ecommerce operations as a whole. In fact, for any small to medium business looking to grow and succeed, partnering with Ordoro makes it easier to be more competitive as you streamline your ecommerce operations at all levels.
What is the lead time meaning in supply chain factors?
There is a strong impact of lead time in supply chain tasks and functions, such as what you encounter with suppliers. For example, one good way to reduce lead time with suppliers is to stipulate terms and conditions regarding lead times. Many may make claims about great lead times but a lot won’t live up to the hype. Knowing your own ideal lead time will put you in a better position to negotiate with new and current suppliers to agree to satisfactory lead times for all parties, especially you.
You could include the following in a contract:
- Lead times for each specific stock /order
- Penalty for delayed or late shipments (assuming this is within the control of the supplier and not an outside issue, such as dock or shipping strike, etc.)
- Penalty for damaged goods during transportation
- Advance notice of stock shortages, discontinuations, or price changes
Lead time in the supply chain can also be managed by:
Ordering more often, particularly if you’re using just-in-time inventory management solutions, as well as by companies not wishing to order more than realistically needed.
Share sales data with your supplier by keeping detailed records of sales data and using those to order future stock from your supplier. You can collaborate with them by sharing the sales information, which lets them know in advance what to expect to ship and anticipate incoming orders. Doing so can cut a big chunk out of lead times while streamlining your purchase orders.
Finally, automating inventory management is one of the best ways to take charge of your stocktaking processes, optimize supplier chains and help balance working capital. If you aren’t already an Ordoro customer, contact us now for a free demo and learn more about taking your ecommerce business to the next levels of success.