What Does Lead Time Mean And How To Reduce It
- Written by Hayley Ward
Statistics show that 17% of consumers abandon a brand if they face a long delivery wait.
Buying goods online has become increasingly popular with more people appreciating the advantages that purchasing virtually brings. This change in retail buying habits changed the world of business. Customer expectations have risen and they now expect that when they place an order online, goods will arrive promptly. The market has become more competitive and online store owners appreciate that they have to deliver a first-class service if they are to remain at the top.
To achieve this, inventory control and the supply chain have to be carefully handled. E-commerce fulfilment can only be said to be 'perfectly managed' when customers receive the correct quantity of products on the date promised. Get this wrong, with orders going astray or being mishandled and buyers will soon go elsewhere.
This problem can be avoided by using specific metrics to ensure that orders arrive on time. One of these key metrics is lead time, which plays a crucial role in order planning, inventory management and delivery.
What does lead time mean in inventory management?
For inventory management, lead time simply means the time it takes from when a purchase order is placed to when it is received in the warehouse.
However, the meaning of ‘lead time’ can vary depending on the context. Other uses of ‘lead time’ include:
- Cumulative lead time – total time taken to manufacture a product, from procurement of raw materials through to assembly and finish.
- Materials lead-time – time taken from the date of order for materials to arrive from the supplier
- Production lead time – time taken by the manufacturer to complete a customer’s order.
- Customer lead time – time taken to complete the customer’s order.
How to calculate lead time for inventory management
Lead time = supply delay + recording delay
- Recording delay = time between the order being placed with your supplier and them confirming and processing the order
- Supply delay = how long the product takes to reach your warehouse from the supplier.
These two factors combined account for the time it takes for suppliers to fulfil orders.
Accounting for manufacturing in lead time
Manufacturing lead time = pre-processing time + processing time + post-processing time.
- Pre-processing = the time it takes to get the order ready for processing
- Processing = manufacturing time
- Post- processing = The time it takes the manufactured goods to arrive at the warehouse.
Examples of lead time
If you are simply ordering the items that are already manufactured, you would use the first formula. So, if it took one day for the order to be placed and confirmed than 3 days for the order to arrive at your warehouse the formula would be:
Reordering delay = 1 day
Supply delay = 3 days
Lead time = 4 days
If, however, the product took 5 days to manufacture as well the formula would be:
Pre-processing = 1 day
Processing = 5 days
Post - processing = 3 days
Lead time = 9 days
The importance of lead time
As one of the key mainstays of inventory management, e-commerce stores must manage lead time correctly. Failure to do so can result in upset customers, lost sales and even damage to reputation.
Once lead time begins to spin out of control, it worsens quickly with future lead times worsening as the supply chain freezes up. More units are required in less time and the company’s inability to supply them then leads to deterioration of regular lead times and upset customers. As stocks run dry, customer orders are unable to be fulfilled.
As you can see, it wouldn’t take long for this type of situation to escalate, causing customers to move to competitor sites for their purchases. The only way to prevent this from happening is to control lead times efficiently and forecast demand accordingly.
What factors affect lead time
Of course, there will be times when unforeseeable factors affect lead time and e-commerce fulfilment. These could be macro events, like the Covid Pandemic, or ones specific to you.
Shipping vessels may be subject to delays, holding up supplies at sea and negatively affecting the lead time.
International shipping can be fraught with difficulty, especially when it comes to having everything in line for customs clearance.
Supply chain issues
Suppliers can run into difficulties so that delivery promises fail to be maintained. The more complex the supply chain, the greater the chance of delays. This is why it is important to choose reliable suppliers and build strong relationships with them.
Most of the time, a 'sorry its late' note just isn't enough! Make sure you take note of what is affecting your lead time.
Six ways to reduce lead time
Lead time is made up of two components: how you manage your orders and communicate with suppliers and how long it takes orders to arrive. To reduce lead time, you need to attend to both. Building strong relationships with suppliers is of particular importance. Let's look at six ways of reducing lead time:
1. Smaller more frequent orders
The larger your orders, the longer they take to complete and ship. By requesting smaller more frequent orders, your supplier can get into a rhythm, producing goods on a regular, rolling basis. This enables your e-commerce store to react in an agile way to market demand whilst making it easier for the manufacturer to control the shipping process.
2. Have clear contracts with your suppliers
Don’t leave things open with verbal contracts. You must have written contracts with suppliers that take account of lead times, detailing penalties for late shipments or damaged/faulty goods. The contract should also ask for prior warnings of any changes to product lines concerning price, specification or availability.
3. Use an automated inventory management solution
Trying to manage inventory manually is a recipe for nightmares, particularly if you have many product lines. By using a spreadsheet this is open to errors: with important information potentially being missed and customers being provided with incorrect information concerning goods availability. This is damaging to both reputation and sales.
The way around this is to use an inventory management system that tracks stock and creates orders automatically when levels reach a specified level. Veeqo is one of these systems, enabling you to enter the lead time into the software and send supplier purchase orders with a click. The software automatically speeds up the process, factoring lead time into your forecasting.
4. Share sales data with your suppliers
When working with your supplier as a partner and building good communication, it becomes far easier to share sales data. By enabling your suppliers to see from the data what is most popular and in demand, they will be on the same page, ready to react even before your orders arrive. This goes a long way towards reducing the lead time as production can be finely attuned to real-time requirements.
5. Use domestic suppliers where practical
It’s not always possible to use domestic suppliers but where possible, this works well by reducing lead time by several weeks – the amount of time it takes to ship. At the same time, you won’t have to deal with communication misunderstandings due to language differences.
6. Stay in touch with your suppliers
We’ve already mentioned building good relationships with suppliers, and this applies to keeping in touch with them regularly. Rather than place the order and wait silently, it pays to communicate with your suppliers throughout the production process.
This way, if problems do occur, you are more able to deal with them proactively. It also helps to provide suppliers with KPIs (Key Performance Indicators), which will prompt them to provide the correct level of service required.
KPIs help to avoid this relaxed manner, prompting the manufacturer to take action if production appears to be slipping behind. By ensuring that the supplier attends to production schedule delays proactively, you avoid delayed stock and lost sales.
As you move forward, you will understand why building strong relationships with dependable suppliers is key to your success as an e-commerce store as they will become as committed to your company’s success as you are.
Why you should try and reduce lead time
You will have more flexibility when it comes to ordering stock if you are in touch with the suppliers. You will have the ability to react to changes in the market, so that if a particular product becomes popular, you know that it will arrive soon after ordering.
Quicker replenishment of stock provides the benefit of avoiding stockouts, lost sales and potential loss of customers.
Longer lead times create a risk that by the time products arrive, they may no longer be required by the customer which could cause returns. You end up with dead stock in your warehouse and customers become frustrated. When you can order smaller amounts regularly, you can be proactive when it comes to customer demands.
Reducing lead time to customers could mean that you outpace your competitors. Being ahead of the game provides the ability to improve customer satisfaction and higher the chances at re-occurring sales.
What is the difference between lead time and delivery time?
Lead time is the total amount of days taken to process and prepare materials, manufacture and transport to the customer. Delivery time only relates to the transport period. When you initially place an order, you are given a lead time. Once it is ready to transport, you will receive a delivery time.
Now, you are prepped to calculate your lead time! Be sure to check out the warehouse management guide to make sure your operations run smoothly.