What is 'Lead Time'

Lead time is the amount of time that passes between the commencement and the end of a process. Manufacturing, supply chain management, and project management scrutinize lead time to reduce the time between conception and finalization of a project. Companies review pre-processing, processing, and post-processing data, comparing each result against benchmarks to determine where inefficiencies exist.

BREAKING DOWN 'Lead Time'

Lead time reduction streamlines operations and improves productivity, increasing a company’s output and revenue. In contrast, longer lead times negatively affect sales and manufacturing processes. Many issues affect a company’s lead time.

How Lead Time Affects Inventory

Stock-outs, as the name implies, occur when inventory, or stock, to fulfill a customer's order is unavailable.  As a result, stock-outs adversely affect consumer demand and manufacturing schedules. Consider an example in which an organization's management either underestimated the amount of stock needed or failed to place a replenishment order. Because suppliers cannot replenish materials immediately, production stops, which can be costly for the company's bottom line. One solution is to use a vendor-managed inventory (VMI) program, which provides automated stock replenishment. These programs often come from an off-site supplier, using just-in-time (JIT) inventory management for ordering and delivering components based on usage.

Lead time varies among supply chain sources, causing difficulty in predicting when to expect the delivery of items and coordinating production. Frequently the result is excess inventory, which places a strain on a company’s budget. Supply chain failures affect non-production due to stock-outs, further straining revenue. A VMI program helps consolidate information about suppliers that store the required components and will ship them as needed. Lead time scheduling allows for the receipt of necessary components to arrive together, and reduces shipping and receiving costs.

Some lead time delays cannot be anticipated. Shipping obstructions due to raw material shortages, natural disasters, human error, and other uncontrollable issues will affect lead time. For critical parts, a company may employ a backup supplier to maintain production. Working with a supplier who keeps inventory on hand while continuously monitoring a company’s usage helps alleviate the issues resulting from unanticipated events.

Disorganization in inventory will increase lead time. Stockpiling necessary parts may be cost-prohibitive. Reducing the number of surplus parts also helps place a ceiling on production costs. One solution is for companies to use kitting services in the organization of their inventory. With kitting services, inventory items are grouped based on their specific use in the project. Workers save time choosing from smaller lots of parts, keeping production more organized and efficient.

How Lead Time Affects Production

Building all elements of a finished product onsite may take longer than completing some items offsite. Delays in transportation and production reduce output and return on investment (ROI). Avoidance of extended shipping lead time by using localized parts and labor speeds production. Offsite sub-assemblies may save hours in comparison to full onsite production. Reductions in production time will allow a company to increase production in less time during periods of high demand. Quicker production can increase sales, customer satisfaction, and the company’s bottom line

Also, the offsite assembly may be cost-effective in avoiding tariffs. As an example, U.S. automakers will produce some of the necessary components for cars sold in China in Chinese factories. This in-country production stage allows them to avoid the 25% tariff on imported American cars.

RELATED TERMS
  1. Purchase Order Lead Time

    Purchase order lead time is the number of days from when a company ...
  2. Just In Time - JIT

    The just-in-time inventory system is a management strategy that ...
  3. Inventory

    Inventory is the term for merchandise or raw materials on hand.
  4. Supply Chain

    A supply chain is a network of entities and people that work ...
  5. Holding Costs

    Holding costs are a major component of supply chain management ...
  6. Perpetual Inventory

    Perpetual inventory is a method of accounting for inventory that ...
Related Articles
  1. Investing

    How to Calculate Average Inventory

    Average inventory is the median value of an inventory at a specific time period.
  2. Investing

    Measuring Company Efficiency To Maximize Profits

    Efficiency ratios can provide indications of profitability, shows how efficiently a company is being managed, utilizes its assets and handles liabilities.
  3. Investing

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  4. Investing

    Reading The Inventory Turnover

    Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ...
  5. Investing

    Tech Stocks to Take Hit in Any US-China Trade War

    There are increasing indications the tech sector will be impacted amid a US-China trade war.
  6. Investing

    Key Financial Ratios for Manufacturing Companies

    An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good long-term investment option.
  7. Personal Finance

    7 Tips For Avoiding Shipping Costs When Shopping Online

    Before clicking on that purchase, make sure you're getting the best deal possible.
  8. Tech

    7 Ways Amazon Uses Big Data to Stalk You

    Using predictive analytics, Amazon anticipates what you are likely to buy, when, and has it boxed and waiting in its nearby distribution center to ship out to you - practically before even you ...
  9. Personal Finance

    The Future of Retail Is Not Big Box Stores

    The future of shopping involves a lot more Internet and a lot less window shopping at the mall.
RELATED FAQS
  1. Does working capital include inventory?

    Learn about inventory that is part of current assets and working capital, which is the difference between current assets ... Read Answer >>
  2. How to calculate the inventory turnover ratio?

    The inventory turnover ratio is a key measure for evaluating how effective a company's management is at managing inventory ... Read Answer >>
  3. Why is it sometimes better to use an average inventory figure when calculating the ...

    For a couple of key reasons, average inventory can be a better and more accurate measure when calculating the inventory turnover ... Read Answer >>
  4. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ... Read Answer >>
  5. What does a high inventory turnover tell investors about a company?

    Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into sales. Read Answer >>
  6. How are period costs and product costs different?

    Product costs are the direct costs involved in producing a product. Period costs are all costs not included in product costs ... Read Answer >>
Trading Center