Lead Time in Inventory Management

Lead Time in Inventory Management

Deskera Content Team
Deskera Content Team
Table of Contents
Table of Contents

There's an old saying!

Time waits for none, be it for humans, business or projects.
Lead Time

When it comes to supply or production function in inventories, ensuring time availability and timekeeping both are important.

But how to ensure this?

There's a concept in inventory known as the Lead Time. In simple terms, it is a scientific monitoring system to measure the tendency of the work done. Not only this, the readers should know the related aspects to lead time.

So, this article will bring in the following:

• What is the lead time?
• How to calculate lead time
• Why lead time is central to inventory management
• Components of Lead Time
• Impacts of longer lead time
• Factors that affect lead time
• Benefits of calculating Lead time
• How to shorten lead time
• Lead Time vs. Cycle Time
• How can deskera help improve your lead time?
• Key takeaways

What is Lead Time?

Lead time refers to the time interval or time duration between the commencement and completion of the project.

To simply put, it is the time-lapse measured from the start to the end of the product.

In broader terms, time-lapse is used differently for different terms like supply chain, business, Human Resource, and other functions, but since the article talks about Inventory Management,

Then; Lead Time can be explained as the time taken by the supplier company to keep their goods ready for delivery. It means as soon as the inventory goes out of stock, at what time they will be able to refill the inventory.

The time taken can be few hours, a day, or maybe days depending upon the product and demand of the product,

Lead time does affect the amount of stock a company needs to keep with itself.

For example, an apparel company dealing in summer clothes should have a 2-day lead time to deliver the products to customers. It can be due to demand or seasonal factors.

If there is an increase in the lead time, customers will more likely shift their preferences due to supply delays from your end.

So a company should emphasize having a lesser lead time!

Remember,

"Low Lead Time generates leads, and High Lead time doesn't."

How to Calculate Lead Time?

Though the lead time seems to be a technical term, the lead time calculation is much more straightforward.

Before we get on the calculation part, it's essential to know that the lead time depends on the steps involved in the supply chain. Based on the sequence of steps, time is calculated to get the exact lead time.

Lead time formula

As the supply chain management system is inclusive of manufactures and retailers, the following formula is used:

For manufacturer

Manufacturing Time + Procurement Time + Shipping Time = Lead time

Manufacturing Time + Procurement Time + Shipping Time = Lead time


For retailer

Procurement Time + Shipping Time = Lead time

Procurement Time + Shipping Time = Lead time


For a better understanding of the calculation process, let's take an example.

Mr. A is a garment producer looking to calculate their lead time for an order of 1000 pairs of socks.

First, let's consider the time taken by Mr. A to produce 1000 pairs of socks to determine their manufacturing time. Let's assume it takes two weeks to manufacture 1000 pairs.

Next, as far as the procurement time is concerned, let's take it around five days. Lastly, we find that Mr. A takes another week to ship the entire load to the customer for the shipment process.

So now we have all the three elements of the formula to calculate the Lead Time.

i.e.

Two weeks (14 days of Manufacturing)

+ 5 days of Procurement

+ 1 week ( 7 days of shipping)

= 26 days ( Total Lead Time)

So Mr. A takes 26 days!

Now, if you want to calculate as a supplier,

then it becomes

Five days of Procurement

+ 1 week ( 7 days of shipping)

= 12 days ( Total Lead Time)

Or you can just remove the days of Manufacturing from the Total Lead Time, the remaining constant that is again equal to 12 days.

26 days of Total Lead Time - 14 days of Manufacturing

= 12 days (Total Lead Time)

One thing to note is that whatever is the lead time, it depends not only on the product but factors stated above.

It is vital to sufficiently inform the customers in advance and improve and reduce the lead time.

Why is Lead Time central to Inventory Management?

As we discuss lead time concerning inventory management, you can say that lead time is necessary to run your inventory smoothly. It is the most critical aspect and a sign of an efficient inventory management system.

Well, this is not the only reason. To understand in-depth about the topic, let's take a look at the following importance to unlock the reasons as to why Lead Time is considered as an essential part of Inventory Management:

  1. Demand Estimation and Forecasts
  2. Order Management
  3. Management of Suppliers

1. Demand Estimation and Forecasts

With the help of lead time, you will be able to estimate demand directly from the market and forecast the requirements of the product in a planned manner. With this, you will be able to set standards well without leaving the scope of inefficiency.

2. Order Management

Handling orders is one of the most demanding jobs in inventory management. With the help of lead time, you can manage your inventory in warehouses and take them out for delivery as per the time. You can also get the advantage of automating orders, thereby saving time and effort spent manually.

3. Management of Suppliers

Through lead time, you can coordinate with your suppliers concerning the requirements and meetings related to the supply of goods. Through this function, you can timely communicate with your suppliers without facing any kind of inventory gap.

So it's explicit about the central role of Lead Time for effective Inventory Management.

Lead time for Inventory Management

Components of Lead Time

The components of lead time can be divided into six major components. All of these components are crucial and are presented in chronological order. The details to which are as follows:

Lead Time Components

1. Preprocessing Time

Preprocessing time includes receiving the request, understanding it, and then creating it as a purchase order. The term is alternatively known as the planning time, referring to making an order for the product/item that one wishes to buy.

2. Processing Time

After preprocessing, the time taken to procure or produce the order based on the previous request is known as processing time.

3.  Waiting Time

Waiting time means the time taken to procure necessary items or raw materials until the production process commences.

4. Storage Time

Storage time is the amount of time taken for the items to stay in the warehouse waiting for delivery

5. Transportation Time

Transportation time is simply the time taken by the item to reach the final customers.

6. Inspection Time

Inspection time is the final component that refers to the time taken to check the products for any defaults or shortcomings before delivering to the customers.

Representation of lead time components

Lead Time = Preprocessing Time + Processing time + Waiting time + Storage time + Transportation time + Inspection time
Components Of Lead Time

Impacts of Longer Lead Time

Longer lead time is one of the significant challenges faced during the process of inventory management. It causes a series of adverse effects both for the seller as well as the customer. The brand value is put at stake because of the dissatisfaction and loss of trust by customers.

It is just one chance, and your competitor took the right turn.

There are mainly three significant impacts of having a longer lead time which can be explained as follows:

  1. Violations of Contracts and Agreement
  2. Halt in the Production and Supply
  3. Inability to generate revenue

1. Violations of Contract and Agreement

Every vendor and supplier comes into a contract. Depending upon the contractual obligations, if there is any violation, then the providers could be fined for non-compliance with the agreement.

If there is a genuine factor-like transportation delay due to bad weather and bad traffic conditions, it is most likely considered but otherwise; it can question the distributor quality and the evaluation process.

Hence, a longer lead time can damage the status and reputation in the overall circle of the supply chain

2. Halt in Production and Supply

Extended lead time leads to a halt in the overall production of the products. The possible reason is due to the lack of components needed to complete the projects. As a result, delay in delivery means a delay in payment, and without payments, everything comes to a stop.

Stopping the production line affects the supply function, and as a result, it creates a situation of limited stock.

This can also cause stock out and inventory shortage situations where neither you are in a position to refill inventory nor in a place to produce new inventory.

3. Inability to Generate Revenue

The more production and manufacturing deadlines increase, the greater it impacts the bottom line. Revenue is the ultimate energy source in the manufacturing process; as soon as client orders are delivered, the much-needed revenue comes in.

But, if you cannot fulfill the order requirements and deliveries, you are very high in facing revenue risk that can profoundly impact you and your business.

Remember,

"Long lead time adds cost with minus profit to the entire supply chain."
Impacts of longer lead time

Factors that affect Lead Time

Manufacturers need to understand the factors that affect the lead time. If the lead time is short, then you are on a positive sign, but if the lead time is long, it is essential to note down, regulate, and optimize the process for better growth and development.

The factors of the lead time can be categorized below:

Fatcors that Affect Lead Time

1. Delay in Shipment

Shipment delays are one of the most common factors that increase the lead time. However, the reason is unpredictable due to weather conditions or unforeseen issues. However, efforts can be made to reduce shipment delays by taking many orders that are in a position to handle well.

For example, in pandemic times, the deliveries and orders were delayed due to protocols. It affected the overall delivery sector that caused problems in the initial stages but later was reduced after the ease of protocols.

2. Unnecessary and Lengthy Process

Sometimes the lead time gets increased due to unnecessary processes involved in assembling raw materials to finished products. As a result, the order completion can take more time as usual, which lowers the output.

It is vital to optimizing the process well such that there are no unnecessary movements. It will help you to save hours and handle the production well.

3. Inefficient in Handling Inventory

If you are unable to manage inventory, then you need to accelerate it now. Manufacturers should take concrete steps to address the stock to know what you need and in what quantity.

With efficient inventory management, you will be able to manage costs and improve the production process.

4. Stock-Out or Situation of Out of Stock

Stock-Out is when the manufacturer goes out of stock, which means the company is incapable of producing new goods due to a lack of sources. The situation can affect not only the loads but will lead to dissatisfied customers.

The situation can worsen, leading to loss of sales, reputation, and customers that can affect you in the longer run.

5. Lead Time Variability

Lead time is affected by variable factors like communication and coordination that are related to delivery. If there are delays, you should consolidate the process with your suppliers to ensure that the production is completed on time.

It can help to make your production process more accessible and effective.

Factors of lead Time

Benefits of Calculating Lead Time

The benefits of calculating lead time are directly affected by inventory management, which includes supply and the manufacturing part.

But this is just one of the reasons. The list doesn't end here, and the benefits of calculating lead time can be stated as follows:

  1. Meeting the deliveries consistently and effectively
  2. Reduces the problem of overvaluation and undervaluation of the stock
  3. Enhances the customer's trust, support, and loyalty
  4. Builds brand value and sets you apart from your competitors
  5. Unlock the doors for innovation to improve lower lead time
  6. Increase in the cash flow of the business by ensuring timely payments
  7. Increases the flexibility in Procurement, shipment, and final delivery of good
Benefits of lead time

How to Shorten Lead Time?

Businesses and manufacturers can create a positive and significant impact in the longer run by shortening lead time.

However, this can be possible by strategies that can help to reduce the lead time. It is important to note that strategy works well depending upon the company's inspection in finding out the loopholes and then working on plans to improve.

The strategies that you can find handy are as follows:

  1. Remove Inconsistent and Unreliable Suppliers
  2. Share Order demand and sales data with suppliers
  3. Automate order processing process
  4. Improve the Communications with your suppliers
  5. Spread knowledge among your customers

1. Remove Inconsistent and Unreliable Suppliers

If there is a delay in the process, find out the practical reasons and replace the vendors by finding a better vendor in that place. Supplier evaluation and inspection are very important for an effective supply chain. If there are any shortcomings on their end, the chances of affecting your business increase.

They are the vital link between you and the customers.

So it is crucial to find out and choose relevant vendors for your goods that can enhance credibility, reduce the cost and help to manage your lead time.

2. Share Order demand and sales data with suppliers

Sharing details related to sales and demand is vital for any company. With this, you will be able to keep your suppliers prepared for the orders in advance to avoid unnecessary problems at the time of delivery. With sales data, suppliers can analyze and anticipate the overall requirements. The strategy will reduce time lead by sharing an equal burden of quantity and meeting customers' expectations.

It also enhances them to handle large requirements as well.

3. Automate order processing process

Automation of order processes helps to reduce the time and workforce to record the details like sales forecasts, sales reports, and demand written manually. By automation of these routine processes, you will focus on the areas that need better attention.

The software and tools can help optimize your supply chain management and assist you in managing working capital and other requirements.

4. Improve the Communications with your suppliers

Poor communication comes with challenges, and effective communication comes with opportunities. A business handles one vendor and a group of vendors, and it's crucial to communicate the necessary information to each vendor based on their role in the process.

Through a proper workflow of communication, problems like miscommunication, miscoordination can be overcome. Businesses need to just drop a single message from one vendor to another or one department to another.

5. Spread knowledge among your customers

Keeping customers up to date about the deliveries and expectations can directly help you reduce lead time. If the business spreads truthful and proper information with them, the customers will build trust toward you that can return, allowing you to increase brand loyalty.

A business should not indulge in any false promises and present the situation correctly. With this, customers will understand your part as well and will be there with you on a retaining basis.

Hence,

"Inspect the shortcomings, build strategies and then implement them for better results."
Shorten lrad time

Lead Time Vs. Cycle Time

Lead Time and Cycle Time are two of the most confusing words in inventory management.

We know about the lead time that is simply the time taken from taking the order to the final delivery of goods.

Cycle Time, on the other hand, is the time taken from the production of goods till the final output of goods. In short, it refers to the time taken by the raw materials to convert into finished goods.

The definition above hints about their differences, and more of it can be discussed below:

BASIS

LEAD TIME

CYCLE TIME

Measurement

Lead time measures time between order and delivery

Cycle time measure the time taken to produce one unit

Purpose

Lead time helps to depict the arrival rate

Cycle time helps to depict the completion rate

Evaluation

Lead time evaluates customer’s wait for product

Cycle time evaluates the demand for the product

How can Deskera help Improve Your Lead Time?

As a business owner, you can invest in Vendor Relationship Management tools by Deskera to help you manage and track your business cycle. A successful business needs an efficient operational cycle process that meets its specific needs. You can apply VRM tools to boost your online business effectively. Deskera is an all-in-one software that can help you keep track of drop shipping and help you digitalize your business with the right tactics and management.

Deskera All in One

It facilitates syncing of data across multiple devices and users hence reducing the chances of making mistakes. It also boosts the productivity of your business and workforce while making them more efficient.

Using cloud computing systems for businesses also minimizes server maintenance, up-gradation expenses, and software licensing to mention a few. In contrast, using a cloud system like Deskera will not only reduce your cost but also make the monthly subscription expense of Deskera predictable and thereby manageable.

In addition to this, Deskera Books will make accounting faster, more efficient, and real-time. This will become the basis for your sales strategy as well as business decisions. Deskera books will also ensure that your business follows the RITE framework of accounting, which will save it money. You can have access to Deskera's ready-made Profit and Loss Statement, Balance Sheet, and other financial reports instantly.

Deskera can also help with your inventory management, customer relationship management, HR, attendance, and payroll management software.

Deskera People and CRM will handle the customers, their experiences, customer after-sales services, and their trends with your business. If any part of business functioning needs a change, it is here that it will be presented.

Deskera CRM

Through Deskera CRM, the sales pipeline can also be designed, customized, and monitored. It will again give real-time feedback for the functions carried out and those forgotten. Email campaigns can also be automated through deskera.

Tasks like Invoice generation, invoice reminders, and integration of functions, inventory, tax calculations, and payments due and receivable can also be brought together in one place.

Deskera is hence your go-to solution for all your business financial reports and more. It will become your guide, mentor, and assistant to help you avoid mistakes and save you money.

Key Takeaways

In this article, we talked about in-depth knowledge about the concept of lead time, calculation, aspects, factors, components, and much more.

The quick briefing of the discussed topics is as follows:

  • Lead time refers to the time interval between the commencement and completion of the project.
  • The lead time formula is different for manufacturers and retailers
  • Lead time is considered an essential part of Inventory Management due to Demand Estimation and Forecasts, Order Management, and Management of Suppliers.
  • Lead time comprises six components: Preprocessing Time, Processing Time, Waiting Time, Storage Time, Transportation Time, and Inspection Time.
  • There are three significant impacts of having a longer lead time.
  • Factors affecting lead time can be categorized due to Delay in Shipment, Unnecessary and Lengthy Process, Inefficient handling inventory, Stock Out or Situation of Out of Stock, Lead time variability
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