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More Inventory Content
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Lead time in inventory management refers to the lapse between when there is order placement for inventory replenishment and when the order is shipped. This metric influences a company’s stock amount at any particular time.
In other words, the time taken from start to finish in the supply chain. The following article familiarises you with the meaning of lead time in inventory, types of lead time, its components, its importance, influencing factors, how to improve it, how to calculate it, and more related concepts:
What is a Lead Time in Inventory Management?
Lead time in inventory is the total time taken when inventory items pass from the beginning of a process till its conclusion. Typically, companies calculate lead time for manufacturing, project, and supply chain management. The stages covered for calculating lead time are pre-processing, processing, and post-processing.
After equating results with the established benchmarks, companies can discern where inefficiencies occur. Decreasing lead time can optimize operations and boost productivity. It is a vital factor when it comes to enhancing the revenue of a company.
Example of Lead Time
You can get a clear perspective on lead time in inventory if you understand it through an example.
Suppose a grand event is scheduled to take place for a week, and it will have 10,000 guests. In the event, suppose a vendor sells 1,000 caps resembling the event’s theme. Let’s consider that this vendor requires one business day to accomplish the cap design, one business day to resolve repairs, one business day to print the cap design, and two business days to ship them.
In this example, the lead time will be five business days. So, the event organizers have to order caps from the cap suppliers for a minimum of 5 business days before the event’s commencement. If this strategy is followed, they can get the caps on time.
If the buyer is comfortable paying a premium price, then the lead time can be reduced. In case the sales of caps on the first day surpassed expectations. As a result, the event organizers might decide to order extra caps on the second day, considering that they would be delivered by the third day.
But the caps are already designed and accepted, the lead time of 5 business days can be decreased to 3. To fulfill the three business days of lead time, the vendor must print the extra caps as fast as possible. By doing this, caps will be shipped overnight for delivery the next day.
Now in this example, some factors can influence the lead time. For instance, if the event organizer wants some caps in different colors and the particular vendor doesn’t have caps of those colors in stock. So, in such situations, the lead time can increase since the vendor has to order caps in that particular color.
What Are the Types of Lead Time?
Major types of lead time are discussed below:
Customer Lead Time
It denotes the time taken between order authorization and order fulfillment
Material Lead Time
It is calculated after the customer requests an order. This metric denotes the time taken to place an order with a supplier and obtain it.
Factory/Production Lead Time
It is measured when the product is available in stock. It calculates the time taken to collect, pack, and deliver a product (if all relevant materials are obtainable).
Cumulative Lead Time
What Are the Main Components of Lead Time?
The significant components of lead time are pre-processing, processing, storage, waiting, transportation, and inspection.
What Factors Affect Lead Time?
If the lead time in inventory is long, it can negatively affect the sales, manufacturing process, and, ultimately, a company’s revenue. Let’s go through the details of factors influencing lead time
Delays in order processing:
Sometimes, a supplier may be incapable of promptly processing the order. The reasons can be technical issues occurring at the supplier’s end or the absence of a certifying authority. In such cases, the reorder time is prolonged, so the lead time increases.
Stock disruption at the supplier's side:
Occasionally, the supplier may face an ‘out of stock issue’ on certain ordered products. In these cases, it takes longer to fulfill the order. Thus, the processing time increases, which delays the lead time.
Unproductive inventory management:
With an inventory management system in place, inventory is managed more efficiently. The use of a productive inventory management system helps a company effortlessly solve reordering delays and protect its stock from loss/misplacement/damage. An unproductive inventory management system can increase the lead time.
Lengthy processes at the supplier's side:
In some instances, incompetent processes at the supplier’s end can create delays. It may happen that the supplier manually tracks orders via spreadsheets. So, any error during data entry would delay the entire order and ultimately increase the lead time.
Strict policies of supplier:
Some suppliers may follow policies that can influence the lead time. For example, if a supplier only ships its order on Friday, the vendor will have to wait a long time to obtain their inventory.
Inconsistency in Lead Time:
A delay from the supplier’s end can increase the lead time. To avoid that, the particular company can join hands with suppliers to make sure all things required for order fulfillment are supplied simultaneously.
Why Is Lead Time Important?
Lead time indicates several facets of the supply chain. Understanding its significance helps a company to control it effectively.
The following points justify its importance:
Guarantees customer contentment and retention:
If the lead time is less, customers receive orders on time. This implies that there are higher chances of customers returning to your store and positively rating your goods or services due to the short lead time.
Efficient operations in the supply chain:
The lead time directly influences supply chain operations. If lead time is less, the delay in fulfilling would be more minor. On the other hand, higher lead time raises the inventory count. So, any organization can optimize its supply chain operations using the lead time.
How Do Longer Lead Times Impact a Business?
If a supplier can’t ship a purchase order timely, the company would have to maintain sufficient stock to meet the orders’ demand during the delay. Also, the company needs to do the same when there is a high risk of losing revenue.
If the lead time is longer, a company must arrange for more reserve stock, so it has to pay more to store it.
Long lead times also influence the flexibility of any business. This is because it leads to more resources to acquire massive product quantities. Hence, it becomes challenging to incorporate new or better products.
Hence, decreasing the lead time positively influences the supply and facilitates cost optimization.
Following these steps can help improve lead time in inventory:
- Firstly, you have to comprehend the different processes of your supply chain closely.
- Record your supply chain processes and recognize aspects that can create delays.
- Make a strategy to overcome the cyclic delays and worst-case circumstances.
- Arrange to overcome festive delays
Lead time in inventory is one crucial measure that facilitates effective inventory management operations. It helps organizations forecast sales, enhance customer satisfaction and retention, and improve workflow efficiency.
The shorter the lead time, the higher the revenue and work efficiency of the businesses. The optimization of lead time makes for easy management of inventory and timely fulfillment of orders.
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If you are confused about how to calculate lead time in inventory, these two formulas will help:
Formula to calculate lead time for manufacturers:
Total Lead Time (LT) = Manufacturing Time + Procurement Time + Shipping Time
Formula to calculate lead time for retailers:
Total Lead Time (LT) = Procurement Time + Shipping Time
Several processes take place the instant a customer requests an order until the ordered products are delivered. Along with the quality of products, customers also emphasize the delivery time. So, from the business viewpoint, it is the lead time.
Essentially, lead time shows the total time taken for any particular process, from start to finish. Especially in a wholesale and retail business, it denotes the time spent between placing an order and the product delivery to customers.
Yes, lead time in inventory is significant for customer satisfaction. These days, all customers demand service or goods as quickly as possible, with minimum effort. The lead time is directly related to the amount of inventory at various supply chain phases.
Here is the lead time in the inventory formula:
Lead time (LT) = Supply Delay + Reordering Delay
Supply delay: Time a supplier needs to accomplish a customer order once it is placed.
Reordering delay: Time difference between a completed order and the request of the next order.
Adopting the following strategies can shorten lead time:
- Get rid of unreliable suppliers from the supply chain.
- Choose vendors nearer to your warehouse.
- Share your demand predictions with respective suppliers.
- Automate your order processing systems.
- Enhance internal communications.
- Finish multiple processes simultaneously.