Lead time is the amount of time that passes between a customer placing an order and the product getting delivered to the customer. This includes three phases:
i) Pre-production time – Time taken to prepare the order for production; like procurement of raw materials, resources, etc.
ii) Production time/ Manufacturing time – Time taken to manufacture the product.
iii) Shipping time – Time taken to ship the product.
Calculating Lead Time
Lead Time is calculated based on the organization’s product or services. Irrespective of the organization’s business setup, be it Business to Business(B2B) or Business to Consumer(B2C), below are the three most common formulas used to calculate lead time.
i) Lead Time (Manufacturing Industry) = Pre-production time + Production time/ Manufacturing time + Shipping time
ii) Lead Time (Customer) = Order Received Date – Order Placed Date
iii) Lead Time (Supply Chain Management) = Reordering Delay + Supply Delay
Lead Time for Customer Orders
This formula is used for calculating the lead time for customer orders. The two main components to calculate lead time using this formula are:
i) Order Placed Date: This is the date on which the order was placed by the customer.
ii) Order Received Date: This is the date on which the order was received by the customer.
The difference between these two dates will give the Lead Time for that particular product.
Let’s see an example using this formula:
A customer placed the order for a customized necklace on 2nd of June . The product was manufactured and shipped. Customer received the order on 12th of June. So the total Lead time is calculated as:
Total Lead Time = Order Received Date – Order Placed Date
12th of June – 2nd of June = 10 days
Lead Time in Inventory Management
Inventory control is the process of monitoring a company’s stock. There are two components to be considered when calculating the lead time in inventory management:
i) Supply Delay = Time between placing, and receiving an order
ii) Reordering Delay = Time that has to pass before placing a reorder (after processing)
The formula for calculating Lead Time in Inventory Management:
Lead Time = Supply Delay + Reorder Delay
Let’s see an example of this.
For example, if an order has been placed on a Thursday but the supplier processes orders only on Tuesdays, then there is a reordering delay of six days (Thursday – Tuesday = 6 days). It takes five days to physically ship the order, so the Supply delay is 5 days.
To calculate the lead time:
Lead Time = Supply Delay + Reordering Delay
Lead Time = 5 days + 6 Days
Lead Time = 11 Days
How to Reduce Lead Time
The more the demand, and orders placed, the longer the lead time. There are many strategies to process orders faster and fulfill customer orders. It is important to reduce the supply chain and this can be done in the following ways:
i) Accept smaller orders: this ensures that there is stock available at all times. Instead of one big order, accept smaller orders in regular intervals.
ii) Go Digital: Automate inventory details so stock is calculated online. This saves a lot of time and does not require a constant check on orders and available stock.
iii) Forecast Demands: Understand market demand trends and have up-to-date knowledge of future demands. This helps to keep stock readily available.
iv) Streamline from Order to Delivery: Keep a keen eye on every order from the time it is received till the time it is delivered to the customer. This ensures delays from the manufacturing end.
Why Reduce Lead Time?
The benefits of reducing lead time are:
i) Improved customer satisfaction by meeting their demand.
Lead time on an order is the total number of days from when a company places an order till it receives the order.
How is Lead time measured?
Lead time is measured by date or by the number of days.
By Date: Lead time = Order Shipped Date – Order Received Date
By Days: Receiving order + Manufacturing the product + Delivering Time = Lead Time
Is lead time the same time as delivery time?
Delivery time is part of the lead time. It is the post-processing phase of lead time. It can be shortened or extended according to the logistic availability. However, lead time is the total time taken from the order placed until it is delivered to the customer.