What Is Lead Time And How To Calculate It

Lead Time refers to the amount of time between the start and end of a process. Businesses can utilize lead time in different areas such as inventory management, manufacturing, and project management. It is a very useful way of keeping everything in control in terms of running a business.

To explain lead time better, let’s talk it over an example:

Imagine you run a clothing company which gets their products from a third-party retailer. In order to keep your stocks in control, you need to use lead time in inventory management. In order to calculate your lead time, you need two different numbers. The first number is the number of days it will take you to request an order from your retailer. The second number is the number of days that it will take your retailer to deliver your products. After you got these two numbers, you sum them up to calculate your lead time.

How to Calculate Lead Time?

Continuing with the earlier example, let’s give hypothetical numbers to calculate lead time in inventory management for your clothing business:

The number of days it will take you to place an order: 2 days

The number of days it will take the retailer to deliver your order: 8 days

Summing up these two numbers show you your lead time: 10 Days

In conclusion, your lead time for that product is 10 days. This means in the next days you need to manage your inventory accordingly to that lead time, or else your business might face a stock problem.

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What is the difference between lead time and delivery time?

So far, lead time and delivery time might have been looked like the same thing, but they are not. They have a huge difference. Lead time includes all the things that might prolong that process while delivery times only considers the time spent during delivery.

So once again going back to the earlier example of lead time in inventory management, two different values are summed up to calculate lead time. One of these numbers is the days you need to place an order.

On the other hand, delivery time only includes the time it takes a retailer to deliver your product, so it does not include the days which pass on your company’s part.

In the end, when calculating the lead time, one should consider all the things that can affect the process to reach the right results. If not, it might have harmful consequences for their business.

cardboard box on wooden shelf

Why is the Lead Time Important?

The lead time might seem like an extremely easy math question on the surface. The benefits of lead time might not be visible the first time you use it. The second or third times might not differ. However, fourth time, it might be exactly what you need in order to keep your business alive. Lead Time is almost like a safety net for your company in certain processes. That safety might not serve a purpose if there is nothing wrong with the processes. Yet, if you properly utilize that safety net in your time of need, your business can avoid many potential disasters.

Time is money

What is lead time in EOQ model?

EOQ is a business model that focuses on constant demand and ordering costs. According to EOQ, there is no lead time for any orders. The main focus of this model is the constant demand and ordering cost of a product. EOQ does not recognize the lead time, so in this model when placing an order from a retailer, the businesses just don’t calculate a lead time. Instead, they focus on how much demand they have for their products and order that much next month, believing them to be constant values. This is one of the biggest issues of the EOQ model. For so many businesses placing orders according to the demand they just had is like walking into the darkness to find a treasure, compared to the safety net of lead time.  

A worker near coffee roasting equipment will check time for testing the sample.

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How do you calculate process time?

The processing time is a phase of lead time. It does not refer to the lead time of “the process”. Instead, process time refers to the actual time that is spent working on finishing “the process”. The rest of the time included in the lead time belongs to other external factors. These external factors slow the process and add to the lead time. Let’s visit our first example once again to explain this difference thoroughly.

Your clothing company needs 1000 dress orders from retailer.

You decide to place orders next day because you have a payment coming up.

The time between you first decide to order 1000 dress and actually placing the order is a part of the lead time yet it is not part of the processing time.

After retailer receives and starts to prepare it, your process time starts ticking.

It is one of the variables in calculating your lead time. It helps with the accuracy of your lead time in the next orders you will make from the same retailer. It is an integral part of the lead time.

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