What is lead time in Inventory Management? Can it affect your business?
December 30, 2021
With the evolution of eCommerce, the entire face of business has taken a different approach. eCommerce has given customers a reason to increase their standards in means of expectations. Customers expect their orders to reach them within days. This has obviously given rise to challenges for retail businesses, which are also in a pretty competitive space.
Businesses have to realize that proper inventory management and a seamless supply chain are the core of a business.
Inadequate inventory management can cause various setbacks in your business, with customer orders being ignored or unfulfilled and delivery dates being postponed.
It is essential to take a certain measure of metrics to make sure that your customer orders are being validated on time. One of the best and standard metrics to follow is lead time, which helps businesses in planning and undertaking orders, reorders, and inventory management.
In this article, we'll understand what lead time is? How to calculate it? How to reduce it? And more. So, hop on, and let's dive deep into it!
So, what is lead time? In general, 'lead time' can give out so many different meanings. It most commonly depicts the time between the beginning of a specific process and its end. In terms of manufacturing, lead time covers the sourcing and preparation of raw materials, their manufacture into finished products, and their dispatch.
Elements that affect lead time in inventory management
There are certain vital factors that can contribute to affecting lead time with respect to inventory management, and here are some of them:
1. Order processing lags
There are times when a supplier might not complete the order on time due to technical issues or even lack of approving personnel. Such occurrences lead to higher reorder time, which simultaneously increases the lead time. The other issues may be due to the shipping and movement. There could be delays from the shipper's side. The other issues can be due to the customs as they may conduct checks at ports, thereby delaying the arrival of your products and thus again leading to an increase in lead time.
2. Stock outages from the supplier
There are chances where the supplier might run out of stock in the inventory on the specifically ordered items. In cases like that, there are possibilities where it can take more time to process the order, thereby postponing the processing time and increasing the lead time.
3. Process delay at the supplier's end
Certain times, disorganized processes from the supplier's side can cause lags and delays. For example, if the supplier intends to manage incoming orders manually with the help of spreadsheets, any error in the data entry will cause lags in the order, increasing the lead time simultaneously.
4. Supplier's conditions
There is the time when suppliers could have specific terms and conditions of their own, and such policies could affect the processing time of your orders. For example, if the supplier chooses to ship orders only on specific days of the week, you will be put to wait longer than usual to get your orders shipped.
5. Growth of supply chain
As your business supply chain evolves and gets more complex, Short-term minuscule problems are to be expected, and they are pretty inevitable. These short-term issues can have an effect on the lead time temporarily. However, as businesses and suppliers work together and get to know one another and form an understanding about each other's requirements, lead time should start to reduce and improve respectively.
How to calculate Lead time in inventory management?
Different circumstances have different lead time formulas to be implemented to calculate the lead time. This can vary from one possibility to another. Various elements like planning, Manufacturing, dispatch lead time are taken into account for calculating lead time.
One simple lead time formula would be:
Lead time= preprocessing period+ processing period+ post-processing period.
To get a clearer understanding,
One lead time example would be: Let's say that the orders are picked up one day after being placed, this is the 'pre-processing' phase, and it takes about 14 days to make a product to order; this is the 'processing' phase. Now. Once the product is packed and sent out to deliver, this is the 'post-processing' phase, and it can probably take about three days to be delivered in hand to the buyer.
Now, considering our lead time formula for manufacturing lead time and putting the numbers together, we get:
1 day(pre-processing) + 14 days (processing)+ 3 days (post-processing) = 18 days
We find that it takes about 18 days to deliver the product in hand to the customer after an order has been placed.
Now that we have seen how it's calculated for manufacturing a product from scratch let's see how it is done for a pre-made as it will have a shorter lead time.
A pre-made item will only require about two days in the processing stage, thus putting into perspective as:
1 day (pre-processing) + 2 day(processing) + 3 days(post-processing) = 6 days in total.
When calculating lead time with respect to inventory management, there are two key factors to take into consideration, The 'supply delay,' which is the time between ordering a product and receiving it, and 'reordering delay,' which is the time you have to stick around before reordering supply products. These two factors determine the amount of time it takes for suppliers to process and complete orders.
This leads us to the lead time formula for calculating inventory lead time:
Lead time = reordering period + supply period
If you feel like your order processes are much more complex and seem to be having difficulty processing your lead time, you can always use a lead time calculator. These lead times can be integrated with inventory management software to fix delivery dates and order processes seamlessly.
How can longer lead times have an impact on your business?
Higher duration of lead time affects your inventory operations for the following factors:
1. High inventory expenses
If your inventory lead time is longer than expected, you'll need to wait for a long time to get hold of your inventory. This will cause you to stock up on your list with more products to meet customer requirements. This eventually increases the pricing of the product and processes businesses less responsive. This also makes introducing new products more complex as the existing stocks are harder to move first, eventually leading to higher inventory storage costs.
You have to understand that lead time can significantly impact the customer experience. Consumers have a lot of choices thrown at them right now, and it's easy for them to carry their business somewhere else if they have ill experiences with a retailer. If their orders are delayed or can't find what they want, they're likely to seek alternative outlets.
2. Higher risk of stock outages due to high demand
When a product's demand rises, you'll need to restock the products in your inventory soon to meet demands. Situations as such put you in a challenging position if your lead times are longer, as you can put your product outage at risk.
These reasons make it a must to decrease lead time to get the best out of your business.
How to reduce lead time?
Reducing lead time will save you on carrying costs spent on storing reserve inventory while it also will help you to handle immediate increases in demand with ease. Following are the steps you can consider to reduce lead time:
1. Choose local suppliers
The farther your supplier is, the more time it'll take for your product to be delivered to you. If your supplier is somewhere overseas, it can take a lot of time for your order to be accepted and processed. Whereas, Choosing a local supplier will always give you a sense of safety and confidence to get your procurement as soon as possible, thereby reducing the lead time.
2. Reward your suppliers
Incentivizing your delivery partner can motivate them to complete their orders at a faster rate. Giving a certain amount for 'On-time delivery' and a lesser amount for 'late delivery' can boost the speed of work of your suppliers. You can do this by adding a lead time clause in your contract that states an additional bonus for on-time delivery of stock. However, since incentives can cost your business some amount, adding this clause only for the suppliers delivering products that have high demand.
3. Pay your suppliers on time
Pay your suppliers on time! I can't stress this enough. Like you wish your stock to be delivered on time, your suppliers want to be paid on time too! This is a process that runs under some form of understanding. If you make your suppliers happy, they are going to make you feel content with their service too. Therefore, never delay your payments.
4. Inform about demand forecast to your suppliers
If your suppliers are informed prior about the orders that are going to be placed, they can prepare themselves to attend to your orders in a better manner. This is the part where you also have to be organized. If your suppliers can start processing your order much earlier, then you need not worry about your stock arriving on time and can relax during peak-demand times.
5. Make use of software for managing inventory
Inventory management systems allow you to digitalize the whole inventory process, thereby improving the overall working and functioning of the inventory processes. The software helps you predict the demand of products using elements like the history of sales and currently moving sales, which enables you to limit the chances of product outages. It also gives you the space to automate the stock reordering process, thereby saving time for reorder requests manually.
Lead time is definitely an essential metric to understand the processing of your order, inventory management, sales, customer satisfaction, and more. However, without the help of seamless inventory management, you will be spending too much time manually integrating purchase orders and giving input data to find ways to grow your business.
Using an inventory management software solution can help you automate your supply chain and process makes purchasing effortlessly without any hassles. Therefore, learn to take care of your lead time and enhance your inventory today to bring the version out of your business. Good luck!
Subscribe to our actionable insights
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.