What is Lead Time? The advent of e-commerce has dramatically reshaped the business landscape, leading to a substantial increase in customer expectations. Nowadays, customers can expect fast delivery of their shipments, posing new hurdles for logistics companies competing in a competitive market.
Hence, logistics providers need to make use of appropriate performance indicators to guarantee timely delivery of packages.
Among these metrics, lead time stands out as a decisive factor, occupying a central position in procurement tactics and, consequently, impacting overall logistics management.
What is Lead Time?
Depending on the specific context, people can interpret the term ‘lead time’ in significantly different ways.
In logistics, lead time is the duration it takes for a product, stock, or shipment to go from the order start to its delivery at the endpoint of the supply chain.
Lead time in logistics is a critical factor that impacts inventory management, order fulfillment, and customer service.
What are the Components of Lead Time?
Here are some key components of lead time in logistics:
1. Order Processing Time
This is the time it takes for an order to be received, validated, and entered into the system.
2. Manufacturing or Procurement Time
This includes manufacturing processes, sourcing materials, and quality control checks.
3. Storage Time
Storage time represents the cumulative duration during which items are held within a warehouse until they are prepared for shipment or delivery.
4. Inspection Time
This is the duration required to examine products for any defects or damages before their customer delivery.
5. Transportation Time
Transportation lead time includes the time it takes for products to move from the point of origin to various transit points and ultimately to the final destination.
6. Customs and Regulatory Clearance
What are the Types of Lead Time
There are several types of lead times in logistics, each serving a specific purpose in the supply chain management process. The types of lead time include:
Decision-making pertains to the duration required by businesses to reach conclusive decisions related to their supply chain operations.
2. Project Approval
Project Approval denotes the period from the initiation of a project request to the point of receiving formal approval.
3. Material Procurement
Material procurement is the overall duration taken by a business to acquire the necessary raw materials for its production process.
4. Product Development
Product development covers the entire duration required by a business to conceive, design, engineer, and manufacture a product before its introduction into the market for sale.
5. Time to Market
Time to market is the duration between a product’s initial conception and its availability for sale in the market.
6. Final Consumer
This is the time it takes for a product to go from the customer placing an order to the customer getting the product.
Difference Between Lead Time, Cycle Time, and Takt Time
While lead time, cycle time, and takt time are related terms, they have distinct meanings:
1. Cycle time measures how long it takes to finish a particular task or project, starting when the task enters the “in-progress” phase and ending when it’s done.
2. Lead time covers the overall duration of an entire process.
3. Takt time represents the time interval between commencing one process and initiating the subsequent one.
While these terms are commonly used in manufacturing and supply chain contexts, understanding them can be beneficial in various process calculations.
What Duration is Regarded as an Extended Lead Time?
The specific duration considered as a long lead time will differ based on factors like the nature of the business, the particular processes involved, and the geographical locations involved.
To accurately identify long lead times, it is advisable to seek the guidance of a supply chain expert or thoroughly comprehend the intricacies of the processes within your operations.
A perfect illustration is a direct-to-consumer (DTC) shipping dead time.
A long lead time for a DTC) ground shipment within the continental United States might exceed one week, covering both fulfillment and shipping transit times.
This is particularly important because consumers now expect quick two-day shipping.
Ideally, when an order is made at a fulfillment center by noon on a business day, it should be picked, packed, and shipped on the same day.
For example, FedEx provides various express services, including FedEx Express Saver, FedEx 2Day, and FedEx Standard Overnight.
Generally, a long lead time for these services might be anything longer than the specified delivery time frame.
For example, if you choose FedEx 2Day, a long lead time might be three days or more.
If your package takes significantly longer than the estimated delivery time to arrive, it may be considered a long lead time.
How to Calculate Lead Time
Calculating lead time is a direct process that plays a vital role in managing projects, supply chains, or manufacturing operations.
Accurate lead time calculations are essential to ensure you maintain the right inventory levels, avoiding both overstocking and stockouts, which can be costly and impact efficiency.
In calculating lead time, it’s important to note key terms like “supply delay” and “reordering delay.”
Supply delay is the time it takes for your supplier to deliver a customer’s order after it’s placed while reordering delay is the time between completing one order and starting the next.
What is the Formula for Calculating Lead Time?
The formula for calculating lead time can vary depending on the context, but one of the most common methods is to subtract the order request date from the order delivery date:
Lead Time (LT) = Order Delivery Date – Order Request Date
When dealing with inventory management, it’s essential to consider both the supply delay and the reordering delay.
In this case, you calculate lead time by adding the supply delay to the reordering delay:
Lead Time (LT) = Supply Delay (SD) + Reordering Delay (RD)
Let’s say you have an order with the following dates:
Order Request Date (OR): August 4, 2023
Order Delivery Date (OD): August 15, 2023
Using the basic lead time formula:
Lead Time (LT) = Order Delivery Date (OD) – Order Request Date (OR)
Substituting the dates:
Lead Time (LT) = August 15, 2023 – August 4, 2023
Now, calculate the lead time:
Lead Time (LT) = 11 days
So, the lead time for this order is 11 days.
If you want to calculate lead time with supply and reordering delays, you need those specific delay durations and add them to the formula:
Supply Delay (SD): 3 days
Reordering Delay (RD): 2 days
Using the extended lead time formula:
Lead Time (LT) = Supply Delay (SD) + Reordering Delay (RD)
Substituting the delay values:
Lead Time (LT) = 3 days + 2 days
Now, calculate the lead time:
Lead Time (LT) = 5 days
The total lead time for this order is 5 days.
What Causes Longer Lead Times?
The following can cause longer lead time:
1. Supply and Labor Shortages
A low supply of raw materials can result in longer lead times, especially if there are shortages throughout the entire supply chain.
Also, there may be delays in task completion due to a lack of skilled labor at various supply chain stages, such as manufacturing, warehousing, and fulfillment.
2. Supplier and Shipping Disruptions
Unforeseen disruptions on the supplier’s end can cause delays and longer lead times.
This might be due to inefficiencies in the supplier’s processes or financial issues that hinder timely deliveries.
3. Natural Disasters
Natural disasters such as floods, landslides, hurricanes, and other weather-related challenges can lead to shipping and manufacturing delays, resulting in longer lead times.
Having contingency plans and diversifying your manufacturers, carriers, and fulfillment center locations can mitigate the impact of such events.
During holidays, transportation companies like trucks, airlines, and ships may have fewer available trips or more shipments to handle because of holiday-related goods.
This can cause delays in delivering products, making lead times longer in logistics.
5. Demand Spikes and Supply Shortages
Sudden spikes in demand, coupled with insufficient inventory supply, can lead to longer lead times.
Reliable demand forecasting tools and models are crucial to anticipate such spikes and plan accordingly.
How to Address Extended Lead Time Issue
Shortening lead time in logistics is essential for improving efficiency, reducing costs, and meeting customer expectations.
Several strategies can be implemented to shorten lead times in logistics, they are:
1. Demand Forecasting
Accurate demand forecasting is essential for reducing lead times.
Understanding customer demand patterns can help you plan production and transportation schedules, avoiding last-minute rushes and delays.
2. Supplier Collaboration
Work closely with suppliers to improve communication and coordination.
Establish clear expectations, share forecasts, and negotiate shorter production and delivery times with suppliers.
3. Inventory Management
Maintain optimal inventory levels to reduce lead times.
Just-in-time (JIT) inventory management principles help strike a balance between excessive inventory leading to storage costs and insufficient inventory causing extended lead times.
4. Simplify Processes
Analyze your logistics and supply chain processes to identify bottlenecks and inefficiencies.
Simplify workflows and eliminate unnecessary steps to reduce lead times.
5. Transportation Optimization
Choose the most efficient transportation methods and routes.
Consider air, sea, rail, and road transport options based on the urgency of shipments and the distance they need to travel. Implement route optimization software to minimize transit times.
Lead time is vital in logistics, as it connects planning and action. Managing it well is essential to satisfying customers, keeping inventory efficient, and running a smooth supply chain.
Regularly improving lead time strategies helps logistics experts succeed. It leads to more competitive and efficient delivery of goods and services.