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What is Lead Time?

Have you ever wondered what is lead time in stock control, and why it is so commonly linked to how well your customers perceive you?

Meet Canary7
What is Lead Time?

Have you ever wondered what is lead time in stock control, and why it is so commonly linked to how well your customers perceive you?

Customers in the 21st century are not easy to impress – they are hard to convince, and even harder to please. They are empowered with the right exposure and knowledge, and expect things to go exactly the way they want. One of the many things customers today have a no-tolerance policy for are delivery times. Once a customer places an order with you, they expect to receive it exactly on time.

This places a burden on you, as a business, to always be on time. If you plan on making a name for yourself in the marketing and building a reliable reputation, you need to make sure that your customers get their products on time. Needless to say, this is a challenge.

As you know, there are multiple layers to the supply chain. Ensuring that your processes across all these layers are streamlined and smooth so that there are no issues with delivery times can be hard – however, not impossible. The key is to tackle the problem at the root, i.e. with inventory management.

An adequate inventory management process can help you speed by the fulfilment process as a whole, leading to more customer satisfaction and retention. And, one of the most important aspects to inventory management is metrics. By basing your inventory management processes on the right metrics, you can speed up your orders and ensure that the customer isn’t left waiting.

In this guide, we will focus on lead time: an important inventory management metric that can help you, as a business, plan reorders, refine your order management, and hence help you deliver your products faster.

What is Lead Time?

What is the lead time in shipping?” “What is lead time in agile?” “What does lead time have anything to do with customer experience?”

All of these are questions very commonly asked.

By lead time business definition, lead time means the period between the start of a certain process and its eventual completion. So, in the business sense, lead time meaning relates to the amount of time it takes for you to finish an order. For example, if you are a manufacturer, lead time would relate to the whole manufacturing process – from the total time taken from the initial sourcing right down to the dispatch of the product falls under lead time.

So, if you’ve been wondering what is lead time in production and what is lead time in manufacturing: it is simply the time you take to complete your product and send it over to your customer.

Types of Lead Time

To understand what lead time is, it is important to also consider the different types of lead time that businesses are likely to most commonly encounter. Let’s take a look at some of these:

Customer lead time

First and foremost, we have customer lead time. This refers to a time or period that spans the time starting from when a customer orders some goods right till the goods are actually delivered to the customer.

So, for the goods that are on your store shelf, the lead time is only a moment from wrapping them and giving them to the customer. However, if the goods are in your warehouse and the customer is, say, based overseas, then the customer lead time will include all the time that takes for packaging, transit, and the actual delivery of the product.

As a general rule of thumb, the best approach is to reduce the customer lead time as much as possible.

Material lead time

Another example of a common lead time, material lead time refers to the amount of time taken to receive materials from a supplier after the initial order is placed. It’s pretty simple, actually: you place an order with your supplier for certain materials. The amount of time it takes for them to actually receive those materials is material lead time.

The material lead time is an important indication of how long it will take you to actually manufacture a product. Of course, if you include it in the overall estimate of the manufacturing time, you can plan things a lot more accurately.

Factory/production lead time

This lead time indicates how long it takes from the point of getting materials to producing a finished product. Needless to say, the shorter this period is, the more beneficial it is for your business. This is because production times are directly linked to delivery speed: if you produce products quickly, you can also deliver them quickly and leave your customers in awe.

For this reason, businesses are encouraged to ensure that production lead time is as short as possible, as this will definitely help them enhance the overall customer experience they are providing.

Cumulative lead time

In general, cumulative lead time is defined as the longest length of time involved to accomplish the activity in question. In the context of manufacturing and retail, it therefore refers to the total time taken to manufacture a product and then process the order for it.

Cumulative lead time should indicate how long it takes you to process your orders, and should give you an idea into your progress and whether or not you should make any changes to improve it and make the most out of your strategy.

Elements of Lead Time

If we break down these lead times, we can get to the five main components of lead time in general. They are as follows:

1. Pre-processing Time

As the name suggests, this time relates to the planning period. You might think that planning the production/purchase of the product would not fall inside the lead time calculation, but it does. This will include the time it takes for you to source the materials for production if you are a manufacturing company or placing a purchase order if you are buying the stock from a supplier.

2. Processing Time

Processing time refers to the period of time that comes after you place your purchase order to procure an item or after you have started the manufacturing process for the product and it is past the raw material stage.

3. Storage Time

This component has to do with the amount of time the stock has to stay in the warehouse. So, it’s crucial to remember that as your items sit and wait in the warehouse, the clock is still running! The longer it takes for them to be out for delivery, the longer your lead time.

4. Transportation Time

Consider this as the delivery time, since this covers the period between the order leaving your warehouse and reaching the customer. Naturally, the farther your warehouse is from the customer’s location, the longer your delay time will be.

5. Inspection Time

If you are shipping the product to an end-user directly, then the inspection time is an additional component. However, if you are a supplier yourself then the time the customer takes to ensure that the order meets the required specifications will be pertinent, and added to the overall lead time.

The reason that it is important to take note of these elements is that if you are looking to cut back on the overall lead times for your business, it would be easier to do so if you have these elements in view, because then you will be able to see any possible problems from the grass root level.

Factors Affecting Lead Time

Want to make sure that you have zero lead time? Before we look at a step-by-step method of reducing lead time and ensuring that lead time delays don’t become a problem for you, let’s have a look at a few things that might mess up with your lead times in the first place.

1. The nature of the production process

The nature of the production process itself has a direct impact on the lead times; in fact, the kind of process you decide for each item For example, finishing the item on location might take additional time than doing it off-site due to the fact that you are likely to be better equipped on-site. Other than that, where you require transportation of certain materials it is likely to make things even more late. So, as you can tell, seemingly trivial things can also cause an impact on inventory management.

2. Stockouts

It’s impossible to aim for a faster lead time when you are struggling to get enough stock to begin with. Whether you are a manufacturer, a supplier, or a retailer – stockout is the one thing that can cause slower lead times throughout the supply chain. while you’re feeling the loss of the essential parts.
The reasons behind a stockout can be vast and varied: did you misjudge how much stock you needed? Perhaps you failed to process your purchase order on time before you ran out of a certain item that has now become absolutely crucial to procure. As common as they are, these seemingly trivial instances can manifest into bigger problems with the stock out lasting for longer than necessary. Either way, these issues would provide a hindrance to the overall lead time, which is a matter of utmost concern.

3. Shipping Delays

Shipping delays are something that can take any business by surprise. While other items on the list are something that can be guarded against and fixed if you refine your inventory and stock management experience, a shipping delay is more or less unpredictable and regardless of the nature of your business, can be of detriment to you.

Various elements can influence shipments, such as raw material shortages, unpredicted disasters, natural events, and of course, human blunder. As one can tell, there is no such things as a 100% protection against these issues. Yet, diminishing risk is certainly in your hands, and if you strategize your shipments, you can easily avoid some major blunders.

If finding a supplier near your house isn’t really doable, then at the very least you should look for a supplier who has their own warehouse and can speedily deliver orders upon request. Another best practice in this regard is to observe your usage regularly and place orders in advance. In addition, it is also a good thing to have less suppliers. The more suppliers you have, the more problems you’ll have to deal with and the more people you’ll have to run after. The less shipments you have coming in, the better you can organise them and make sure that none of them are worsening your lead times.

4. Too many processes

As any business, there are probably some processes that need to be in place in order to ensure that everything is going well. However, the more processes you add to the overall fulfilment procedure means the more you are overly and unnecessarily complicating its completion.

Overburdening your employees with too many processes means that you are decreasing your output and productivity, which then leads to a decreased lead time anyway. Whether you are a manufacturer or a retailer, there will always be a few processes that are not very necessary to go through, and you can get rid of them to ensure that your lead time doesn’t suffer.

5. Disorganised Inventory

Another reason behind longer lead times is disorganised inventory. But for this, we need to go into slightly more detail.

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Lead Time and Inventory Management

Before we move on to understand the relationship between lead time and inventory management, it is important to take a look at why lead time is important for the overall operations of your business.

Why Lead Time is Important in inventory?

Lead time is important because it:

Helps you set standards and identify inefficiencies
Boosts productivity
Adequately restructure operations
Equip you with a competitive edge
Increase customer satisfaction
Cut down on certain financial costs

As we mentioned in the introduction, lead time is directly linked to inventory management. If you are facing lead time delays, you know it’s a problem that must be fixed by focusing on the inventory management processes within your business. It is only when you turn to your inventory management that you can get to a short lead time.

Whether you manufactuer your own products or have a supplier that sends you the products before you sell them to the customers, lead time delays in any part of the process can be the cause of many disasters. There are many reasons behind such delays. For example, human error, shortages, or even natural disasters can result in a delay. However, the most common reason for lead shortage is inefficient inventory management.

In a way, the relationship between inventory management and lead time is somewhat of a cycle. Lead time delays in the production/preparation of your products leads to inventory management problems, whereas inefficient inventory management slows down the fulfilment process even further and causes delays in the dispatch.

The solution to short lead time, therefore, is pretty obvious. In order to ensure that your lead time doesn’t suffer – whether you are dealing with a supplier or manufacturing your own products, you must focus on inventory management.

The Lead Time Formula

The main formula for lead time is:

Lead time (LT) = Order Delivery Date – Order Request Date

If you are planning to account for a reordering delay, you should use this formula instead:

Lead time (LT) = Supply Delay (SD) + Reordering Delay (RD)

There are many online lead time calculators that you can use for free. However, if you have an inventory management system in place, then a lead time calculator would be a part of the software anyway so you wouldn’t have to worry about these formalus!

Step by Step Instructions to Reduce Lead Time

And now, let’s look at a few ways you can lower lead times:

Get rid of unnecessary processes and activities within your organisation

As mentioned earlier, an influx of activities and practices that are of not important value in the long run might seem like a good work culture to set up, but they aren’t. In fact, it would be better for you to actually observe all your processes and identify which ones are important, and which ones aren’t. That way, it can be easier to see which activities should actually be there, and which ones would be better to get rid of. Set up a rundown of these practices and wipe out those that your business can manage without, and only keep those that have a positive impact on the quality of the product.

Change delivering strategies

So, we know that one of the most prominent reasons for increased long lead times is shipment problems. It’s better if your organisation devises delivery strategies that are faster than existing transportation and shipment techniques. Alternatively, your strategies could also be focused on dealing with strategies that help you procure more products than your existing strategies do. Changing to a more adaptable transportation technique can continuously decrease your lead time, despite the fact that it might come at an extra expense since it will definitely be worthwhile.

Source items locally wherever possible

When it comes to the raw materials of your production process, always buy from a local supplier. In fact, wherever you can, source your purchases locally. Purchasing items locally, rather than obtaining from global providers, lessens the lead time in light of the fact that the items are shipped over a more manageable distance. Obviously, if you go for buying from someone who is not even based in the same locality as you will cause delays, which is why you should avoid that wherever you can.

Vertical Integration

For this tip, you may have to combine the processes of two suppliers or production processes within your own company. So, for example, you have to start the manufacturing processes of two different items, but they use the same parts for at least one stage. What you can do is combine the processes of these two together, so that you save time on both ends and can improve your lead in both regards.

Start relying on automation

In 2022, you should already know that automation is your friend. This becomes even more important to understand when you realise that very frequently, lead time delays are caused by human beings. Especially when you employ an individual and make them liable for making ends meet in terms of procurement and other such things, it can quickly become quite hard to streamline everything.

This is why you should adopt technological means and software solutions for these tasks. One such way is to get an inventory management system which can then be used to create a proper framework for all the processes that feed into your lead time. Relying on an automated solution such as an inventory management software means that you will be able to minimise human error and delays, and in turn can make sure that your customers don’t have to wait too long to receive their orders.

Inventory Management Related Tips for Lead Times

Working on your inventory management is a great solution if you are looking to speed up things in your warehouse. Remember: a better inventory can lead to better lead times automatically.

Here’s how you can improve your inventory overall:

Use reports to keep an eye on stock levels.

Reports that not only record current trends but also help you track patterns that can be look at in the future will assist you with changing your stock levels to match the amount of expected orders. This will lead to better order management, improve your lead time, and is obviously a great inventory management practice that is great to implement into your system. With the help of the right inventory management processes, you can even make some other important changes. For example, you can ensure that you are staying away from the “one extreme or another” condition of over-or under-requesting stock.

Track current stock precisely.

One of the biggest benefits of inventory management is that when done properly, it helps you stay on track throughout your journey. An inventory management system, for example, can conveniently employ technology such as barcode scanning and RFID solutions which help you follow current stock from start to finish.

All you have to do, however, is ensure that all of the stock you have or get is properly scanned. So, avoid stuffing it into boxes or pressing out onto racks. Help your staff to filter all things as they move into and out of stock to guarantee that things are followed precisely.

Focus on current items when it comes to selling

You can do this by employing an inventory management method called FIFO (first in, first out). FIFO is all about getting rid of items as they come. This will involve you paying more attention to the things you have on hand.

Another way is to study customer behaviour and focus on the bestselling item. So, essentially what you have to do is prioritise requests of new stock around the thing that is selling energetically. This way, you will only be focusing on things that are actually selling, instead of wasting money, resources, and time on items that aren’t even selling.

Ditch the accounting sheets

With so many software solutions available in the market today, it’s difficult to figure out the reason why you would still continue to utilise bookkeeping sheets and other documents akin to spreadsheets. Bookkeeping sheets require you to enter information manually. This means they are incapable of synchronising effectively with different frameworks, and require a great deal of time to control and utilise. This takes more time and hence, causes unnecessary delay in your lead time.

If you employ an inventory management system instead, you can easily ditch the sheets and have an easier, considerably more effective inventory management solution at hand. Not only can you save yourself from hours upon hours of tedious manual input, but you can also save yourself from the prospect of disappointing your customers.

Get safety stock

It’s obvious that you want to keep stock levels at the right levels at all times, but this doesn’t mean that you shouldn’t prepare for emergencies. There will be many times when your orders require you to dive into a safety stash. What if there is a seasonal spike in your sales? Or what if a celebrity uses your product and suddenly, everyone else wants to as well? If you fail to show up in these situations with a good lead time, your customers can stay mad at you forever, which would dent your reputation.

Hence, a good inventory management practice that would help lead times would be to plan for a crisis and have emergency stock available. Not only will you be ensuring that your customers are happy, but you will also be relieving yourself and your employees off a considerable amount of burden. Having the comfort of safety stock can also help you increase your productivity – and after all, that’s what every business wants.

Wrapping Up

Your customers want you to deliver their orders on time, and you can only do that with a good lead time in place. There are many things that can slow down your lead time, however, the most pertinent of them all is inventory management. If your inventory management is not up to the mark, your lead time will suffer.

Therefore, in order to ensure that your lead time brings success to your business – start working on your inventory management. You can do this with the help of a good inventory management system like Canary7!

For more information, book a free demo here.

Meet Canary7
What is Lead Time?

Meet Canary7
What is Lead Time?

What is Lead Time?