Lead time

What it means

Lead time is the total time from placing an order to delivery of goods or completion of a service. It includes order processing, queuing, production, inspection, packing and transport. For the customer it is the time they must wait to receive what they ordered.

The term is used on both sides. In purchasing it is the time a supplier takes to deliver materials; in sales, the time the company takes to deliver to its customer. It differs from the contractual delivery time in that lead time is the time actually measured, which can vary.

Lead time directly affects inventory levels. The longer delivery takes, the more material a company must hold so that production does not stop while it waits. A long and unpredictable lead time ties up money in stock and increases working capital needs.

How it works in practice

In purchasing, the reorder point is calculated as consumption during the lead time plus safety stock. If a hundred units are used each week and delivery takes three weeks, an order must be placed at the latest when stock falls to three hundred units plus a buffer for fluctuations.

MRP systems work with the lead time of each item and, based on the production plan, suggest when to order what. Under a just in time approach, short and reliable supplier lead times are a precondition; otherwise production stops at the slightest delay.

Shortening lead time improves the cash conversion cycle because money spends less time tied up in materials and work in progress. Removing waiting between steps, smaller batches, nearer suppliers and better information sharing with them all help.

What to watch out for

Average lead time is not enough; its variability matters too. A supplier who delivers in one week one time and three weeks the next requires more safety stock than one who reliably delivers in two. When choosing suppliers, track their on-time delivery as well.

Lead times can lengthen suddenly when supply chains are disrupted, for example by component shortages or transport problems. Do not promise customers shorter delivery than the company can realistically achieve, and address force majeure and the consequences of delay in contracts.