With a strong brand, effective product, and eager customer base, your company has everything covered. But items can’t magically appear in customers’ hands, even if your store or warehouse is a block away from the destination. And if you take too long to deliver, you risk customers being dissatisfied with their experience.
To prevent this, you need efficient strategies that cut the time it takes to manufacture and transport inventory, also known as lead time — especially if your products are perishable or in high demand. Keep reading to learn how to calculate lead time and why it matters.
What is lead time?
In manufacturing, lead time means one of two things:
- The time it takes to manufacture inventory and get it to your warehouse, also known as cycle time
- The time it takes to bring finished products to customers
In either scenario, factors like purchase order processing, vendor processing times, and shipping all lengthen the stages between the initial order and the product’s arrival.
The behind-the-scenes journey varies greatly from product to product and order to order. With so many moving parts, lead times are difficult to predict. Pinpointing the different factors that could impact operations and calculating an estimated lead time gives you the information necessary to plan ahead. You gain the tools and knowledge you need for a smoother customer experience, and that means stronger satisfaction and loyalty.
Lead time versus cycle time: What’s the difference?
Manufacturing lead time and cycle time are synonymous, but lead time can also refer to the order fulfillment process. Cycle time focuses solely on the internal production or processing speed. Both periods are equally vital to efficient inventory management and lean manufacturing processes.
Why is lead time so important?
Knowing your lead times lets you practice effective inventory management and boost customer satisfaction. Here’s how getting a handle on these calculations benefits your company:
- Efficient inventory management: Using lead times to predict when to order stock helps you maintain optimal levels and reduce inventory costs.
- Customer satisfaction: Receiving stock at the right time means sending orders faster, enhancing customer experience. And if there’s a delay, knowing the lead time lets you communicate with customers so they can adjust their expectations. This honesty strengthens relationships, even if deliveries are a bit late.
- Flexibility and adaptability: Knowing lead times lets you respond quickly to changes in demand and market conditions. You don’t have to waste time wondering when orders will come in or calculating margin of error.
What factors affect lead time?
A number of factors slow down or speed up your lead time. Some, like how quickly you process orders or unload deliveries, are within your control. You can take steps to address these internal factors and shave some hours off the total time.
But there’s not much you can do to prevent external factors, like delays at customs checkpoints and other supply chain risks, from impacting lead time. The best option is to assess each step of the manufacturing and delivery process and allow leeway for anything that could slow delivery down. Build in enough of a buffer to delight the customer when their order arrives early instead of disappointing them when things are late.
Here are some potential roadblocks to consider:
- Natural disasters
- Supplier problems
- Stockouts
- Product testing
- Transportation delays
- Redundant processes
- Labor shortages
- Human error
How to calculate lead time
The formula for calculating lead time is simple:
Supply delay + reordering delay = lead time
But this formula isn’t helpful if you don’t know the two delays’ lengths.
First, discover how long your supplier takes to ship your orders and how their schedule works. Say your supplier takes three days to deliver, but they only process orders on Mondays. If you place an order on a Tuesday, that adds a six-day reordering delay.
Using the formula above, this means your total lead time is nine days:
3 days supply delay + 6 days reordering delay = 9 days of lead time
Lead time is often expressed in days, but depending on your suppliers’ schedules and how long it takes to receive your orders, you may swap days for weeks or months.
4 other factors to consider when calculating lead time
Supply and reordering delays aren’t the only things to include in lead time calculations. Here are four other factors to keep in mind.
1. Safety stock
Safety stock is the extra inventory businesses keep on hand to prevent stockouts caused by uncertainties in the supply chain. This inventory acts as a buffer to ensure you continue to fulfill orders, even in the event of unexpected delays or demand. Here’s the formula:
(Maximum daily usage x maximum lead time) – (average daily usage x average lead time) = safety stock
2. Reorder point
The reorder point is the level of inventory at which you need to place a new order to replenish stock before it runs out. To calculate it, use this formula:
(Average daily usage x lead time) + safety stock = reorder point
The more accurately you calculate safety stock and reorder point, the better your lead time calculations will be.
3. After receipt of order (ARO)
The time it takes for a supplier to process an order is known as after receipt of order (ARO). This includes the time needed to verify the order, process payment, and pick, pack, and prepare the order for shipment. When you know suppliers’ AROs, you predict stock arrival more accurately, improving lead times.
4. Manufacturing lead time
Manufacturing lead time is the total time required to manufacture a product from start to finish, including sourcing raw materials, producing goods, and checking quality. This type of lead time is a smaller part of your overall lead time, which also includes shipping.
7 strategies to reduce lead time
Here are some strategies for reducing lead times and getting orders out faster.
1. Automate inventory management
Automating your inventory management processes has myriad benefits. Along with saving time, it helps you manage supplier relationships, improves lead time calculations, and makes it easier to track inventory and order data. If you only put one item on your to-do list, it should be implementing automation for your operation.
2. Use demand forecasting
Accurate demand forecasting is an absolute necessity for effectively managing inventory, but sharing forecasts with suppliers also results in lower lead times. If you give suppliers data about customer demand, they can anticipate your needs and expedite the fulfillment process when needed.
3. Offer supplier incentives
Maintaining a positive relationship with your suppliers plays a critical role in keeping lead times low. But if suppliers continuously struggle to fulfill your orders on time, you might need to take additional measures to protect yourself from delays. Consider providing a bonus or other incentive if they ship orders early or tacking on a penalty if they’re late. Incentives like these encourage suppliers to stick to the terms of the contract.
4. Try kitting
If you have supplies or product components that you sell separately but customers often use together, consider assembling them into a single package or SKU. This tactic is called kitting, and it increases the efficiency of your orders. Your employees won’t spend as much time finding or organizing parts, and customers buy more products from you.
5. Look for local vendors
Try finding suppliers who are located as close to you as possible. This cuts down on the time it takes for their orders to arrive. And if you’re using international suppliers when comparable domestic options are available, making the switch lets you build stronger vendor relationships because your points of contact are closer. You also avoid customs delays.
6. Adjust order volume and frequency
Ordering in bulk might seem like an easy way to save money on supplies when you ramp up production to meet seasonal demand. But if large orders negatively affect your lead times, bulk ordering may cost you more in the long run. Compare the costs and experiment with your order volume and frequency until you find one that works for your business. Remember to include the cost of storing extra inventory when calculating your total expenses.
7. Improve your production process
Even though it’s not part of the lead time calculator, takt time affects your manufacturing process. This is the rate at which a product needs to be completed to meet customer demand. Takt time is calculated by dividing the available production time by customer demand.
A faster takt time means products are ready faster, shortening the production portion of the lead time. Optimizing takt time and streamlining production processes can reduce lead times even further.
Fishbowl makes calculating lead times easy
Reducing and calculating accurate lead times is easier with Fishbowl, the all-in-one inventory management solution. It’s designed to help you control stock, warehouse operations, and manufacturing workflows — just to name a few functions. Through automation and other advanced features, Fishbowl streamlines operations from start to finish, leading to happier customers and a stronger bottom line.