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What is Lead Time? Definition & Formula
inventory management

What is Lead Time? Definition & Formula

If you’re in business, the last thing you want is customers waiting too long for an order or service. This is why lead time is so important, and if you get it right, you can enjoy better profitability by reducing downtime and wastage. 

In essence, the definition of lead time, in regards to inventory management, is the amount of time between when a customer places an order and when the order is shipped or delivered. How long does it take for the company to fulfill orders? 

Lead time can be affected by several factors that occur between order and fulfillment. These include:

  • Procurement time which refers to the time it takes a company to complete administrative duties related to new orders, such as getting materials or assigning work
  • Manufacturing time the time a company takes to produce a product from raw materials
  • Shipping time is the time it takes to send the finished product to a customer. 

The importance of lead time

Lead time is one of the most essential aspects of inventory management. This is because you need to ensure your calculations are carefully made to avoid periods where orders cannot be fulfilled due to a lack of stock or raw materials. 

A stock delay can directly affect customer satisfaction and cost efficiencies in production. 

In manufacturing and service-based industries, shorter lead time leads to more capital and fewer labour costs. So tracking and calculating your lead time is important in inventory management. 

How to reduce lead time 

Within manufacturing and inventory management, you can take the following steps to reduce lead time without compromising the quality of your products or services. 

  1. Monitor transportation and courier - Continuously monitor transportation and delivery times. This will give you a good indication of whether you need to move to a different transportation supplier or shipment method. 
  2. Incentivise completing targets faster - Provide rewards for employees who meet their targets and expectations. 
  3. Learn new and researched methods - Sometimes, there are more efficient ways to do a job, and research is constantly ongoing on how to do things faster and better. 
  4. Have higher safety stock or order more frequently - You can accomplish a faster turnaround time if you have everything you need to complete your job or product on hand. 

How to calculate lead time?

The formula for lead time comprises the different components that lead time can consist of; namely procurement, manufacturing, and shipping lead time.

Lead time = Procurement time + Manufacturing time + Shipping time
Discover QuickBooks Free Inventory Management Tools & Templates

A few examples of calculating lead time are as follows. 

To save time and avoid doing manual calculations you can use our lead time calculator.

Example 1

For retail, let's take a look at a shop that sells basic apples at the local market. 

The only aspect to consider in this example is procurement time since you, as the shop owner, will not be part of manufacturing the products. Also, customers will visit your shop and purchase directly from the shelf. There will be no shipping time involved.

The total lead time will be only four days since no shipping or manufacturing time is involved. 

Example 2

For a service and project management example, let’s look at an accounting practice team creating and delivering a report.

In this example, you will consider procurement time and manufacturing time. Since there will be no physical product to ship, shipping time does not factor in. 

Procurement time relates to the time it takes to assign team members to specific roles and set deadlines, which could be one day.

Manufacturing time could be linked to the time it takes to undertake the data entry and calculations to produce the report, which could be 14 days. 

Total lead time 1 + 14 = 15 days to produce a report from request date to delivery.

Example 3

For a manufacturing and e-commerce example, let's look at an online printing company. 

For the last example, we will consider all three aspects of lead time. 

Procurement time - this would be the time from when the order was placed to get all the necessary details from the customer. For example, the design details and assigning the task to a team member: 2 days.

Manufacturing time - would be to design the product and then print and cut the approved design: 5 days

Shipping time - this would be from the day you deliver it to the courier to when the customer receives the product: 3 days

Total lead time 2+5+3 = 10 days to design and ship a product to a customer.

Using software to improve lead times

Regardless of your industry, technology has made it a lot easier to keep track and maintain up-to-date records of your lead times within your company. 

The Quickbooks platform can help make your lead times more efficient. Our innovative software will keep track of your inventory and send alerts when stock is low. This ensures your business runs smoothly, which is what any business owner strives for. Visit our pricing page to view plans or sign up for a free 30 day trial.

Manage your inventory seamlessly with QuickBooks Inventory Management Software