Lead Time – What Is It and Why Is It Important?

What is lead time

Do you know the secret to retain your customers? There are many of them. However, one aspect of your order-fulfillment process impacts it the most, which is Lead Time. It is the amount of time between initiation and completion of any process. For businesses, lead time is the amount of time between a customer placing an order and the services/products delivered to them.  

Lead time has many types, and it impacts the way a business operates. It also affects the quality of services. In this article, we will dive into what lead time is, its types, why it should be less, and how to optimize it. Let’s begin, shall we? 

Everything You Need to Know About Lead Time

When a customer places an order, they want it to be delivered quickly. One study found that 14% of consumers abandon the seller if they receive a late delivery just one time. Hence, if your e-commerce fulfillment process takes too long, you’ll lose sales. In order to retain your customers, make sure to reduce your lead time.

What is Lead Time?

What is lead time infographics

Lead time is the amount of time that goes by from the start to finish of any given process. For eCommerce businesses, it affects every stage of the supply chain. Moreover, it determines the quality of your services. If lead time gets out of control, it can cause huge issues in inventory management and the order-fulfillment process. Hence, it is essential to optimize lead time. 

Types of Lead Time

Components of lead time infographics

There are various types of lead time, depending mainly on the operations of a business. For example, for an eCommerce business and fulfillment center, there are four types of lead time:  

Customer Lead Time
It is the amount of time taken between order confirmation and order fulfillment.

Material Lead Time
This is calculated after the customer places an order. It is the amount of time it takes to place an order with a supplier (in case you are out of stock) and receive it. 

Factory/Production Lead Time
This time is calculated when you have the product in stock with you. It is the amount of time it takes to pick, pack, and ship a product if all the materials are available.  

Cumulative Lead Time
This is the summation of material lead time and factory lead time. It is the total amount of time it would take from confirmed order to delivery of the product. 

Customer lead time is the crucial marker in determining the satisfaction of your eCommerce business, while cumulative lead time affects inventory planning and cash flow. 

Lead Time VS Cycle Time VS Takt Time  

Lead time is somewhere related to cycle time and takt time, but it also differs from them in certain aspects. 

-Takt Time: It is the rate at which you need to complete the production process in order to meet customer demand.  

-Cycle Time: It is the amount of time it takes to manufacture a product from start to end.  

Takt time is based on customer demand, whereas cycle time depends on the work process. Therefore, always make sure that your cycle time fits your ideal takt time. You can make some adjustments to achieve this. Additionally, it provides you a shorter lead time, which in turn helps fulfill customer demands. 

Importance of Shorter Lead Time in Fulfillment  

Lead time determines many aspects of the supply chain. Hence, understanding and controlling lead time is paramount. When lead time is optimized, it becomes easy to manage inventory and fulfill orders on time. 

Customer Satisfaction and Retention  

When lead time is less, your customers receive their order on time. Hence, customers are more likely to return and rate your services positively with a shorter lead time.  

Enhanced Supply Chain Operations  

Lead time affects supply chain operations. Delay in order-fulfillment is less when lead time is less. Moreover, higher lead time increases the inventory count. Hence, with the help of lead time, you can optimize your supply chain operations. 

Factors Affecting Lead Time

There are several factors that affect lead time:  

Stockouts  

Stockouts can affect any element of your supply chain. If you don’t have products or can’t get them on time, you can’t fulfill orders on time. Stockout can be a result of miscalculating your lead time. Focus on avoiding this situation, if you run an eCommerce business. 

Shipping Delays  

From human errors to natural disasters, there are many factors that are uncontrollable and can cause a delay in shipping. Unfortunately, it’s impossible to eliminate shipping delays. However, you can always opt for a 3PL like Fulfillment Hub USA that is proactive in finding workarounds for shipping issues.  

Inefficient Inventory Management  

An inventory management system helps you manage your inventory with ease. When you have an efficient inventory management system, you can easily overcome reorder delays and save your inventory from misplacement, loss, or damage. If you have an inefficient system, it can lead to a higher lead time. Hence, try to implement automated inventory management software to reduce lead time and fasten the order-fulfillment process. 

Lead Time Variability  

The amount of time it takes to get your products delivered from different suppliers is unpredictable. Therefore, a delay from any supplier can lead to a higher lead time for you. To avoid this, consolidate suppliers so that you’ll get all that you need for order fulfillment at the same time. 

Lead Time Reduction

Higher lead time impacts the lifespan of a business. It determines customer satisfaction, quality of the services, and sales. Hence, it is important to reduce the lead time to scale your eCommerce business. Though uncontrollable factors affect your total lead time, you can take several steps to minimize it.  

Use Contract with Suppliers  

Start by creating a contract with suppliers that include definite timeframes. Some suppliers promise timely delivery but fail to deliver. This results in a higher lead time. The best way to avoid this is to have a legal agreement that includes the following lead time elements:  

– Delivery time for specific orders  

– Advance notice of price changes or stock shortages  

– Liability for damaged or incorrect goods  

– Penalty for delayed shipments  

– Agreed-upon delivery time for all orders  

Reorder More Often

If placing large order demands a higher lead time, it’s worth ordering in smaller quantities. Adjust your reorder points and try a different warehousing approach to lower your lead time.  

Share Inventory Forecasting with Your Suppliers 

If you are expecting a huge sale in the future, let your suppliers know about it. Then, they can prepare the goods in advance for you and deliver them on time.  This helps you reduce lead time and serve your customers with timely delivery.  

Provide Incentives to Suppliers  

As discussed above, you should apply a penalty to suppliers for the late delivery. So, it would be best to offer incentives to suppliers who deliver on time or in advance. When you appreciate their services, it gives them a boost to deliver on time in the future.  

Declutter Non-Value-Adding Tasks  

Among various activities that you perform in your order-fulfillment process, make a list of all the activities and determine processes that do not add value or prolong lead time. Then, eliminate all those activities or only keep those that impact the process remarkably. 

Try Kitting  

When you kit products that are ordered frequently together, you limit the time it takes to pick, pack, and ship products. Hence, with kitting, you can easily reduce your lead time.  

Explore Shipping Methods  

Check out different shipping methods if the one that you are using is increasing your lead time. It can lead to a higher cost than the preferred shipping method, but it’s worth checking out if it reduces your lead time and improves your services.  

Use Inventory Management Software  

When you manually manage everything, there’s a high risk of human errors. Hence, it is effective to use a better inventory management system that automatically tracks everything and gets you insights into inventory and forecast demands.  

Essential Formulas

Here are some essential formulas that help you calculate important metrics:  

Lead Time (LT) 

For manufacturers,   

Total LT = Manufacturing Time + Procurement Time + Shipping Time  

For retailers,   

Total LT = Procurement Time + Shipping Time  

Procurement time can include the amount of time it takes to pick and pack goods.  

Cycle Time:  

Cycle Time = Net Production Time / No. Of Units Produced  

Takt Time:  

Takt Time = Net Production Time/Units Required (Customer Demand) 

Lead Time in a Nutshell

Lead time is a crucial metric for an eCommerce business. It determines operational flow, cost, productivity, customer satisfaction, and ultimately, sales. Therefore, if you want to optimize your order-fulfillment process, you should focus on reducing your lead time.  

Optimize Lead Time with Fulfillment Hub USA 

Fulfillment Hub USA is your tech-driven 3PL partner. We offer affordable eCommerce fulfillment with tech-integrated inventory management solutions. Our 5-in-1 cloud-based software helps you track your inventory in real-time, provides you insights, helps you forecast demands, and much more.  

We equip your business with the latest technologies to help you reduce your lead time. Moreover, you get access to the best shipping partners worldwide and their timely delivery services. Contact our experts today to lower your lead time and enhance your customer’s experience with us.  

FAQs

What is lead time?  

Lead time is the amount of time it takes for a process to complete from beginning to end. For businesses, it is the amount of time from the moment a customer places an order to when they receive the product.  

What is lead time formula?  

Lead time (LT) is calculated as the total time it takes to pick, pack, ship, and deliver products.  

For manufacturers,   

Total LT = Manufacturing Time + Procurement Time + Shipping Time  

For retailers,   

Total LT = Procurement Time + Shipping Time  

Procurement time can include the amount of time it takes to pick and pack goods.  

What is lead time gap?  

Lead time gap is the difference between logistics lead time and customer order cycle time.  

Logistics Lead Time = total time to complete the picking, packing, and shipping. If you manufacture the product, then add manufacturing time as well.  

Customer Order Cycle Time = the amount of time the customer is prepared to wait for the product to arrive from the moment the order is placed.  

What are the types of lead time?  

There are basically four types of lead time: customer lead time, material lead time, factory/production lead time, and cumulative lead time. 

Anjali

She is an avid reader turned content creator. She has over 4 years of experience in writing B2B and B2C website content, articles, and social media content. She has worked with different types of content; from tweets to full-fledged video scripts and privacy policies. Apart from reading and writing, she connects with plants, travelling, and psychology.

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