What is Lead Time in Inventory Management? 8 Important Strategies to Minimise Lead Time

Next-day delivery has become a standard expectation among online customers. As a result, consumers’ willingness to wait for their orders has decreased dramatically in the last half-decade. You’ll lose business if your eCommerce fulfilment procedure takes too long. Reduced lead timings are one of the most effective strategies to decrease your delivery window.

Businesses calculate and shorten lead timings to match customer expectations and sustain their market position. It also improves manufacturing efficiency and increases sales income. Extended lead timings can be caused by various issues, including supply, production, and delivery delays, which can impair manufacturing and sales. Many people confuse it with throughput or cycle time, which is the time it takes to complete a procedure or order from start to finish until the product reaches the consumer.

A better grasp of lead time, what it entails, and how cutting it may help your company develop. In this article, you’ll learn all you need to know about this and how to utilize it to improve order fulfilment.

What is Lead Time in Inventory Management?

Time taken from when a purchase order is made to when it is received in the warehouse is referred to as lead time in inventory management.

The definition of the term lead time, also known as a lead period, on the other hand, varies depending on the situation. It is also used in the following contexts:

Customer Lead Time

The time it takes for a client’s order to be accepted and fulfilled is referred to as the customer lead period. The order fulfilment on the selected delivery date might be either a doorstep delivery or a pickup from an accessible area.

Material Lead Time

The time it takes to place an order with a supplier and receive the cargo is known as a material lead period. These are often large orders of raw materials needed in the production process or as inventories.

So, whereas customer lead time refers to the time it takes for a product to reach its final destination, material lead time is primarily concerned with the production process.

Production Lead Time

The production lead period is the time it takes to make and send a product to the target destination, assuming the essential raw material is available, and there is no supply or logistical delay.

Cumulative Lead Time

The total of material and manufacturing lead timings is the cumulative lead period. Overall, it takes from when an order is confirmed to when it is sent, assuming that a raw material order must be placed.

The overall lead time in inventory management for creating and delivering items comprises all of these aspects. For eCommerce fulfillment services, the customer lead period is the most crucial satisfaction metric. Customers anticipate quick delivery. Therefore cutting the time between consumer order and delivery will help you improve revenue.

Your inventory planning and cash flow are affected by the time it takes to complete each part of your supply chain. For example, assume you wish to reduce client wait times by adhering to lean business management concepts and utilizing just-in-time inventory management. You’ll need to lower your material and manufacturer lead times in such a situation.

Components Of Lead Time

The components of the lead period may be broken down into six categories. These elements are all essential and are given in chronological sequence. The following are the specifics:

Preprocessing Time

Receiving the request, interpreting it, and then converting it to a purchase order takes time. The word is also known as planning time, which refers to placing an order for a product or item one desires to purchase.

Processing Time

The time it takes to obtain or generate an order based on a prior request is known as processing time after preprocessing.

Waiting Time

The time it takes to get essential products or raw materials before the production process begins is called waiting time.

Storage Time

The time it takes for things to sit in a warehouse waiting to be delivered is called storage time.

Transportation Time

The time it takes for an object to reach its final destination is known as transportation time.

Inspection Time

The third component is inspection time, which refers to checking items for defects or flaws before delivering them to clients.

Importance of Lead Time In Inventory Management

Businesses must be able to manage timelines. For example, stock can run out, and customers’ orders can’t be fulfilled if lead timings aren’t controlled properly.

When lead periods become unmanageable, a vicious cycle might emerge, with lead times deteriorating as demand rises. This lag between customer orders and manufacturing may result in additional delays, causing the lead period to worsen. As a result, lousy order management may cost a company a lot of money by costing its valued clients and damaging its brand.

Mention below are the points which show the importance of lead time in inventory management-

• Customers expect high-quality items delivered as fast as possible. Therefore a shorter lead period aids in customer satisfaction. Customers prefer to purchase from vendors that bring meals in the shortest amount of time as a result of this.
• To retain the inventory, the lead period is crucial. For example, suppose a corporation knows how long it will take to manufacture a product. In that case, it may order additional material in advance, reducing the possibilities of a material shortage or surplus in inventory.
• To attract clients, eCommerce businesses use lead time in inventory management as a USP. This is because customers are increasingly demanding high-quality items as quickly as feasible.
• A company’s lead timings estimate how many items will be made and delivered at a given period. Therefore, they can boost their money creation by improving the pace.
• The lead period is beneficial in decreasing inventory waste. Instead of holding surplus goods in storage, the management will order merchandise as needed at a particular time.

Lead Time Is Central To Inventory Control

Regarding inventory management, you can state that lead time is required to keep your inventory running correctly. It’s an essential hallmark of a well-functioning inventory management system.

This isn’t the only reason, though. To have a better understanding of the subject, examine the following factors: To understand why Lead Time is regarded as an essential aspect of Inventory Management, consider the following:

Demand Estimation and Forecast

You will be able to assess demand straight from the market and predict the product’s requirements in a planned manner with lead time. As a result, you will be able to establish high standards without allowing inefficiencies to creep in.

Order Management

Order fulfilment is one of the most challenging aspects of inventory management. You may control your inventory in warehouses and take it out for distribution on time with the aid of lead time. You can also benefit from the ability to automate orders, reducing time and effort spent manually.

Suppliers Management

You may cooperate with your suppliers on needs and meetings linked to the supply of goods using lead time. Using this capability, you may contact your suppliers on a timely basis, avoiding any inventory gaps.

As a result, the importance of Lead Time for good Inventory Management is evident.

Factors Affecting Lead Time

Manufacturers must be aware of the elements that influence the lead period. If the lead period is small, you are on the right track, but if it is large, you must document, control, and optimize the process to achieve superior growth and development.

The following are the elements that influence lead time:

Delayed Shipment 

Shipment delays are one of the most typical causes of lead time extensions. However, the cause is unknown owing to weather conditions or other unforeseeable circumstances. However, by accepting many orders that can be handled efficiently, efforts may be taken to lessen shipment delays.

For example, due to procedures, delivery and orders were delayed during epidemic periods. It impacted the whole distribution industry, which caused issues in the beginning but was eventually alleviated due to the simplicity of processes.

Unnecessary and Protracted Procedure

Due to redundant processes needed in assembling raw materials to final goods, lead times can often be extended. As a result, order completion may take longer than usual, reducing production.

It is critical to optimize the process so that no needless motions occur. In addition, it will allow you to save time and effectively manage your production.

Stockout Situation

When a manufacturer runs out of stock, it signifies that the firm cannot produce new products due to a lack of resources. Not only will the scenario harm the loads, but it will also result in disgruntled consumers.

The issue might deteriorate, resulting in a loss of revenue, reputation, and clients, which could have long-term consequences for you.

Variability in Lead Time

Variable aspects connected to delivery, such as communication and coordination, impact lead time. If there are any delays, you should collaborate with your suppliers to guarantee that the manufacturing is completed on time.

It can assist you in making your manufacturing process more accessible and efficient.

How Lead Time Affects Inventory Control

Stockouts are common in companies that keep inventory for use in manufacturing. This happens when the stock on hand runs out without fresh stock arriving. Stockouts typically inconvenience customers because they must wait for orders to be met, while the firm incurs costs since it may be compelled to halt operations. In addition, employees and manufacturing machinery will be idle for a while during stockouts. Still, the firm continues to pay utility expenditures such as power, water, gas and administrative costs.

Lead period delays, which vary by supplier, are the most common source of stock shortages. Natural catastrophes, human error, raw material shortages, inadequate inventory management systems, and other issues are all significant causes of lead time delays.

A vendor-management inventory tool that automates the stock ordering process can help businesses decrease stockouts. The application saves supplier information for each component, making it simple to order them as they near completion. By making inventory requests early enough to avoid stockouts, automatic ordering shortens lead timings and lowers delivery costs. In addition, the firm can keep a database of backup suppliers for the most crucial components to supply inventories if the primary source is unavailable or out of stock.

Impact of Shorter Lead Time

The primary logistical objectives are to get the right items to the right place at the right time, in the right amounts, and under the right conditions. The lead period is a temporal factor in the logistics equation that is directly tied to service quality but significantly impacts stock control and demand planning.

Let’s look at the reasons why having a short lead time is critical to your business:

1. More accurate demand forecasting: Short-term demand forecasting allows for more precision. One of the fundamental rules of thumb in demand management is that the further into the future you plan, the more unpredictability there will be. Shorter delivery periods can alleviate this problem by allowing for more reliable and accurate forecasting.
2. The ability to carry less inventory: a short lead time implies you can fulfil client demand with a lesser inventory level. The fundamental purpose of warehouse management is to bridge the time gap between when a customer puts order and when the supplier delivers the order to the client. The impact of supply delays on inventory policy is linear: the longer the lead time, the more stock is kept on hand, and vice versa.
3. Customers want high-quality service in a short amount of time, with little effort, and at a fair cost. You may provide consumers precisely what they want if you have a shorter lead period, such as quickly responding to changing client demand, completing the specified order quantity in less time, repairing damaged items in less time, and lowering expenses throughout the process.
4. A shorter lead period will save you money and allow you to deliver on schedule. Furthermore, a shorter lead period results in more order fulfilment, which equals more cash flow.
5. You don’t need to purchase in bulk if your lead period is minimal since your complete processing procedure is rapid. This keeps your inventory at the proper level, allowing your business to function smoothly without the stress of having too little or too much stock.
6. Last-minute modifications can only be implemented when lead periods are short since you can swiftly update items without delaying the purchase and jeopardizing client happiness.

Furthermore, short lead times allow you to adjust to changes in market trends swiftly. All without the risk of losing money.

Impact of Longer Lead Time

To preserve the effectiveness of their operations, manufacturers and suppliers rely significantly on factory direct and authorized distributors to fulfil orders and satisfy business expectations. When lead period unpredictability becomes a problem for supply chain management, distributors and providers may experience longer lead periods and lower productivity.

Some of the more frequent, longer lead period variability issues that wreak havoc on supply chain operations are listed below.

Stoppages in the Production Line

A long lead period might stop production if engineers don’t have the components they need to finish the project. Preventing the production line causes suppliers to fall behind on client demands, resulting in another issue of low supplies. If a market expands and authorized distributors cannot meet demand, original equipment makers will fall behind on their manufacturing demands for clients.

To guarantee that planned orders are delivered on time and to the buyer’s satisfaction, authorized distributors must use a highly effective in house or third party logistics management system. Stockouts and inventory shortages might result from lead time variability difficulties, prompting you to either find a more dependable parts supplier or place a one-time purchase with an independent distributor.

Revenue Generation

The more significant the impact on a company’s bottom line, the more manufacturing deadlines must be stretched. They could even wind up paying extra money to get parts from an unvetted independent distributor so that manufacturing projects can be completed and client orders can be delivered, bringing in much-needed income. Conversely, if a company cannot fulfil order demands for its clients, lead time variability severely threatens its earnings.

How to Calculate Lead Time

Lead time (LT) = Order Delivery Date – Order Request Date is the most straightforward fundamental formula.

This method, however, allows for a reordering delay in the context of inventory management.

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

The time a supplier takes to fulfil a client order after it has been placed is known as supply delay.

The period between a completed order and placing the following order is known as the reordering delay.

It is also necessary to account for reordering delays.

Some vendors may only take orders once or twice a week or once a month. This means shops must plan for this delivery delay to keep a safety supply or buffer stock on hand.

While waiting for your supplier to replace your supply, you can satisfy orders using your safety stock.

Let’s imagine you sell 500 shirts every day on average. Supplier A, on the other hand, only takes orders for shirts every five days. This signifies that your shirt supplier’s reordering time is five days.

Let’s pretend that A delivers shirts to your warehouse in 2 days. This results in a two-day supply delay.

In this instance,

The lead time is calculated as follows: supply delay (5 days) + reordering delay (2 days) = Seven days.

It should be simple to stock up for seven days.

But what if you were selling something valuable and uncommon, such as exotic plants or fancy home decor?

Such items are likely to be slower-moving than apparel and eatables, with significant supply and reordering delays.

This implies you’ll have to prepare for their acquisition, stock, and sale months ahead of time.

But how can you figure out how much stock you’ll need and when you should restock?

The answer resides in the reorder point and safety stock.

How much of a safety stock should be kept on hand?

Safety stock is the amount of inventory you must have on hand in case of a supply or reordering delay.

Its calculation accounts for lead time and demand variability (possible demand variations).

Customer demand for items might fluctuate owing to various factors such as vacations, weekends, wholesale price fluctuations, special offers, and so on.

Besides that, managers must prepare for unpredictably fluctuating demand, such as unexpected shortages, weather disruptions, and so on, because supply and demand are inextricably linked.

The formula for safety stock is as follows:

(Maximum daily sales*Maximum lead period) – (Average daily sales*Average lead time) = Safety Stock   

When is it time to restock?

The level of inventory that signals that you need to restock are known as your reorder point. The reorder point calculation influences your choice to replenish as inventory management, and the formula denotes it:

(Lead time * Average daily sales) + Safety stock = reorder point

It’s time to pick up the phone and shop for some goods every time your stock reaches the reorder mark!

Your reordering quantity will correspond to the amount of safety stock you have on hand.

Additional factors to consider while determining lead time

ARO Lead Time

The point at which the supplier gets an order is known as the after receipt of the order (ARO). The overall period between ARO and order delivery makes up the lead period. Thus this is the first thing to consider when calculating the lead period.

Lead Time in Manufacturing

The manufacturing lead period is known as the time it takes for a merchant to place an order and for the product manufacturer to complete it. It comprises the time spent acquiring, manufacturing, and shipping items.

8 Best Strategies to Reduce Lead Time

Remove Unreliable Vendors From Your Supply Chain.

Do you get late delivery from particular vendors regularly? Keeping them in your supply chain might be more expensive than switching vendors.

Even when considering the possible cost of a change, research conducted by NC State University reveals that supplier assessment nearly always has a favourable influence on a company’s financial performance.

If you decide to switch suppliers to shorten your lead time, ensure you have adequate inventory to carry you through the transition. Additionally, be sure that your new supplier is ready to begin shipping you things straight immediately.

Select Vendors Who Are Near Your Warehouse

You have access to more sellers than ever in today’s global economy. Unfortunately, while searching for the most significant rates worldwide, you may find yourself waiting weeks for things to arrive from another country. This extends your lead period and makes returning broken or undesired items more difficult.

Giving attention to local vendors to your warehouse or manufacturing site is one of the simplest lead time reduction methods for suppliers. If a local supplier can’t compete on price, consider placing larger (but less regular) orders from foreign vendors and maintaining a more extensive inventory.

Share Your Demand Forecasts With Your Suppliers

Your orders may differ monthly if you work in a naturally fluctuating business. To keep your suppliers prepared for larger-than-normal purchases, let them know that you foresee an increase in demand as soon as possible. This ensures that they are not only capable of handling a huge order but also capable of doing it as rapidly as feasible.

Internalize External Processes

Do you manage most of your manufacturing processes in-house, but not all of them? Consider expanding your capabilities so you don’t have to outsource the finishing of your items to a third party. This demands a considerable initial expenditure, but the long-term savings make it a financially viable choice in most cases. Furthermore, you’ll be laying the groundwork for future expansion, allowing you to expand once your revenues rise quickly.

Workflows for Order Processing Can Be Automated

Ensure your internal procedures are up to standard after you have your raw materials and are ready to begin manufacturing. Consider:

1. When it comes to consumer purchase orders, how long does it take you to enter them into your system?
2. How long does it take you to get them through production and quality assurance when it comes to engineering change orders?
3. How frequently does the process become stalled due to internal miscommunication?
4. How frequently do orders go missing completely?

Your lead times will most certainly deteriorate due to poor performance in any of these areas. However, automated order processing procedures might help you get your final items out the door faster.

Complete Many Processes at the Same Time

They were not getting past the fact that specific procedures must be finished before others can begin. However, if you can find strategies that many people can execute simultaneously, you can boost productivity and shorten lead times even more.

Internal Communications Need to Improve

Order processing necessitates the participation of all members of the team. Internally, if you’re not cooperating correctly, you might be causing unnecessary delays.

Suppose your process has numerous phases requiring input from multiple individuals. You may be wasting time you don’t have. This is especially true if you’re working with non-trackable paper. Paper-based projects on someone’s desk lengthen your lead time and raise the risk of misplaced paperwork.

Even though poor communication is a complex problem, manufacturers have numerous alternatives for removing bottlenecks. 

Communicate With Your Customers More Effortlessly

So while this doesn’t help you cut your lead time in half, it does keep your clients informed as they wait for their orders. In addition, in several studies, communication has been proven to be a significant predictor of customer loyalty. Therefore it’s a crucial factor to consider.

Consider investing in a system that will send out order alerts if you aren’t already doing so. (There are dozens of tools that automatically handle notifications, so automation is a significant time-saver here.) However, it’s a simple – and relatively straightforward – technique to boost satisfaction and set expectations.

Conclusion

Staying on top of your business necessitates short lead times. In addition, they assist you in enhancing your cash flow and client satisfaction by allowing you to adapt to shifting market patterns.

You may utilize it to optimize and reorganize your supply chain and production process now that you know how to calculate it.

While understanding the lead time formula is a fantastic start, you can’t keep calculating things by hand all the time.

It’s all about saving time, remember?

Businesses should obtain everything they need to improve their supply chain and manufacturing process, from workflow automation and customized widgets to project planning and resource allocation.

Allow WareIQ to Assist You in Reducing The Lead Period.

We at WareIQ know how important it is for you to keep your business operating correctly, and we’re here to assist you.

We’ve given hundreds of businesses the tools they need to automate their order processing. So what’s the result? Less time spent on inefficient back-office operations means more time for sales and product development. You may even cut the lead period by partnering with WareIQ for inventory management and eCommerce fulfilment.

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