How To Calculate Lead Time
There are seemingly endless factors for any business to consider when trying to increase productivity, revenue, and customer satisfaction. Everything, from volatility in your supply chain to minor issues with inventory shrinkage, can have an impact on your bottom line. In order to achieve those goals, you have to continually improve your business’s efficiency, and one of the most important ways you can do so is by calculating, assessing, and reducing your lead time.
Lead time is the sum of a supply delay and a reordering delay. The relatively simple formula is:
Lead Time = Supply Delay + Reordering Delay
However, actually calculating lead time isn’t quite that easy. First, you need to determine what your supply and reordering delays are. As their names imply, a supply delay is how long a shipment takes to reach your warehouse, while a reordering delay is the amount of time it takes for a supplier to accept and replenish your order.
For example, say it takes three days for a supplier to physically ship your order to you. However, the day you place your order can affect the length of time it takes to receive it. If you place an order on a Tuesday, but your supplier only processes orders on Mondays, there will be a reordering delay of six days. Using the lead time formula, this means your total lead time is nine days:
9 Days Lead Time = 3 Days Supply Delay + 6 Days Reordering Delay
Lead time is often expressed in days, but depending on your suppliers’ schedules and how long it takes to receive your orders, it may be more appropriate to use weeks or months.
What Is Lead Time?
Lead time is “the length of time between when an item is ordered and when it is added to a company’s inventory.” It includes the time every step of this process takes, from how long it takes to prepare an order to how long it takes you to put it away in your warehouse. Lead time can vary greatly between different products, and even with the same product between different orders. It has a direct impact on the amount of stock you should hold at a given time. For this reason, it’s crucial to regularly calculate and record lead time for your different products and orders.
What Factors Affect Lead Time?
There are a variety of common factors that can either reduce or increase lead time. Internal factors, such as your business’s ability to process customer orders or how quickly you can unload and put away orders once they arrive, can easily add to your lead time. Generally, you can control these internal factors and take steps to reduce their impact on your lead time.
However, a number of external factors can also impact lead time. In some cases, you may be able to prepare in advance for a longer lead time. For instance, if you order from a new supplier, you can expect that their ability to get your order to you will differ from a supplier you’ve established a relationship with. For others, there may be unexpected or uncontrollable factors that increase lead time, such as delays at customs checkpoints. While there isn’t much you can do to fix the factors that are beyond your control, it’s important to keep them in mind when considering how to improve lead time.
Why Is Lead Time Important?
Lead time plays a vital role in effective inventory management and customer satisfaction. If you have long lead times, you have to hold more stock in reserve to quickly and completely fulfill customers’ orders. Of course, you have to pay for this storage, which results in higher inventory costs as well as potential revenue losses. It can even affect your inventory at different points in the supply chain — not just what you physically store in your warehouse or at your business.
Further, your lead times affect how adaptable and flexible your business is. When you have to dedicate resources to purchasing and storing large quantities of supplies, you don’t have as much space, time, or money to explore new product options. You may not even have the resources to find ways to improve upon your existing products and processes.
Finally, customers expect their online orders to get delivered to them quickly. Thirty-nine percent of surveyed consumers believe quick delivery is “very important,” with another 39% claiming it is “rather important.” If you take too long to ship out what your customers have ordered, they may not order from you again and choose to shop with one of your competitors instead. You need to do what you can to retain customers and continually improve their experience with your business — which means looking for different ways you can improve your lead times.
How Do You Improve Lead Time?
Luckily, there are a number of steps you can take to improve lead times in your business. The following strategies can be helpful for achieving this goal, but it’s particularly important to find what actually works for your business.
- Automate inventory management: There are countless reasons you need to make use of an accessible inventory management software solution, including lead time reduction. Automating your inventory management processes can help with managing supplier relationships, getting your orders to them more quickly, and sharing necessary information with your suppliers. Additionally, it can help with lead time calculation and keeping track of your inventory and order data.
- Demand forecasting: Accurate demand forecasting is an absolute necessity for effectively managing inventory, but you can also share this information with your suppliers to improve lead times. If they have data about customer demand, they can better anticipate your organization’s needs and expedite the fulfillment process, especially if you’ve got a big order coming up.
- Supplier incentives: Maintaining a positive relationship with your suppliers is crucial to keeping your lead times low, but if your suppliers continually have trouble fulfilling your orders in a timely fashion, you may need to take additional steps to protect yourself. Consider providing a bonus or other incentive if they ship your orders in advance of the projected date, or a penalty if they’re late. Doing so may help your suppliers stick to the terms you’ve already agreed upon.
- Kitting: Consider grouping different supplies or product components that are often used together, but usually sold separately, into a single bundle or order. This process is called kitting, and it can help increase the efficiency of your orders. Your employees won’t spend as much time trying to find or organize parts, and you can put away your incoming shipments more quickly.
- Local companies: Try finding local suppliers or, at the very least, suppliers who are physically located closer to your business. If your suppliers are closer to you, it won’t take as long to ship your orders. Further, if you switch from international to domestic suppliers, you won’t have to worry about time differences that can affect communications or delays at customs that could hold up your order.
- Volume and frequency adjustments: You can always adjust how frequently you place orders, and how much stock you receive with each order. Ordering in bulk may seem like a simple way to save money on your supplies, but if it’s negatively affecting your lead times, it may actually cost you more in the long run. Compare these costs to determine which option is less expensive, and experiment with your order volume and frequency until you find what works best for your business.
Calculating and improving your lead times can be a complicated and frustrating process, but it’s a worthy undertaking. Speed, efficiency, and customer satisfaction are top priorities for any business, all of which can be directly influenced by lead times. By focusing on lead-time improvement, you can make a huge difference for your customers and, by extension, your bottom line.