What is the Lead Time?
Lead time is the time between the beginning of the manufacturing process and its completion. The different types of lead time include
- Supply chain management
- Customer lead time
- Surveillance of pre-processing, processing, and post-processing.
Significance of Lead Time Formula
Calculating lead time is beneficial for companies in inventory management and affects each supply chain step. Some of its significance include:
- A shorter lead time reduces outdated goods
- It may also lead to less labor cost
- It also gives you more orders due to fast delivery
- Shorter lead times also result in happy customers
Applications of Lead Time
- Companies can use lead time judiciously as manufacturers can cut down extra time and can give more time to manufacturing
- It also gives details on time taken to manufacture and deliver the product
Lead Time Formula
Lead time formula =
Pre-processing + Processing + Post Processing
Pre-processing = Stage when raw materials are sourced and delivered to manufacturers
Processing = Manufacturing Stage
Post-processing = Stage of processing and delivering orders
Lead Time formula =
Procurement Time (for final products) + Shipping Time
Understanding with the help of an example
Imagine that you have a card-making company. For a specific occasion, your company manufactures 10,000 cards for retailers. It takes you 1 day at the pre-processing stage when you’ve received the raw materials, 2 days of processing when you have to make the cards with the help of workers, and 1 day to deliver them to vendors.
Therefore your total lead time would be 4 days. However, it can be reduced if the demand is high and retailers want fast delivery. Manufacturers can ask for more payment (aka premium delivery) if retailers need a shorter lead time.
Lead time is the total time required by manufacturers from beginning to end till it reaches the retailers or customers. You can increase or decrease time based on demand from the other party.