What is lead time in inventory management?

Lead time in inventory management is the lapse in time between when an order is placed to replenish inventory and when the order is received. Lead time affects the amount of stock a company needs to hold at any point in time.

How to calculate lead time:

  • Determine the supply delay.
  • Determine the reordering delay.
  • Sum supply delay and reordering delay

The first step in calculating lead time is to factor in the reordering delay. For example;

When considering the total amount of time for a purchase order to be delivered from a supplier, factoring in the time taken for the supplier to accept and process the order. So, if the supplier only accepts reorders once a week and you place an order 4 days before the day the order will be accepted by the supplier, your inventory will need to last an addition four days. This additional 4 days is known as the reordering delay. The lead time is the sum of the supply delay, which is how long the shipment takes to reach your inventory, plus the reordering delay. 

Therefore, the lead time formula is: 

Lead time = the sum of the supply delay and the reordering delay. 

Lead time directly affects your total inventory levels. The longer your lead time the more stock you will need to hold in your inventory. Longer lead times make deliveries more unpredictable and forces a company to rely heavily on demand forecasts to make orders. Once you have calculated your lead time, the next step is to employ corrective measures to reduce it. 

How do longer lead times impact a business? 

If a supplier is unable to deliver a purchase order on time, the company will need to have enough stock on hand to fulfill orders during the period of delay or risk losing revenue. 

tradegecko-smallbusiness-successThe longer the lead time, the more stock a company has to keep in reserve and pay to store. Longer lead times also impact the adaptability and agility of your business. With more resources being dedicated to purchasing larger quantities of the same products, it becomes harder to introduce new or improved products to your brand.

Therefore reducing lead time not only positively affects supply chain efficiency, but it helps optimize costs, too. 

What are the factors that affect lead time? 

You may be wondering, in a world where same-day deliveries exist for retail customers, how can lead times on a purchase order take several weeks?

While there have been improvements to shipping and freight services in recent years, there are other factors that affect lead times. Orders may take time to process and be approved within your business, your suppliers will then need to place orders of their own for the materials to create your products, there might be delays due to checks done at the ports by customs. All of these factors add to your lead time.

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When you first start expanding and outsourcing parts of your supply chain, your lead time is bound to increase. However, once your supplier is familiar with your products and orders and you are more aware of regulations, the process is likely to speed up. 

How can you effectively shorten your lead times and optimize inventory management?

The first thing to do when trying to reduce lead times is to understand your supply chain processes, from end-to-end intimately. Document your supply chain journey and identify all the points along the way where you can expect waiting times.

Plan for the worst-case scenarios as well as seasonality. What if your supplier is delayed just before a Christmas sale? Once you understand what the long possible lead time looks like you can work from there to reduce it.

Here are some factors you can consider:

  • Increase the frequency of order and decrease the volume
    Instead of ordering a large amount of inventory, order smaller amounts that take less time to manufacture and ship. Your inventory is then replenished more frequently and more consistently. 

  • Incentivize your suppliers
    Work a lead time clause into your contracts with suppliers. This could either be in the form of a bonus should they deliver well in advance of what they estimated or in the form of a penalty if they are delayed. This helps in getting your suppliers to stick to the agreed lead times. 

  • Automate your inventory management process
    Speed up your time to market by automating your inventory management workflows. With tools like TradeGecko you can reduce the time taken to create and manage purchase orders, always be in contact with your suppliers, keep track of stock levels all without worrying about manual data entry and human error. 

  • Go local
    It should not come as a surprise that shipping your products from international suppliers will increase your lead time. Finding international suppliers may seem appealing due to potentially lower manufacturing costs, but in the long run, it could cost your business more if you are just waiting for stock to arrive. Finding local suppliers could help reduce your lead time significantly. 

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Lead time is an important metric to understand because you can use it to help forecast sales, improve customer satisfaction and improve efficiencies in your operational workflows. However, without proper inventory management, your team will be too busy manually reconciling purchase orders and entering data to find innovative ways to grow your business. 

TradeGecko’s inventory management software automates your supply chain, from end to end, making purchasing effortless and error-free. Manage your lead time and optimize your inventory today.

 

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