Lead Time: Definition, How it Works, and Example

What Is Lead Time?

Lead time is the amount of time that passes from the start of a process until its conclusion. Companies review lead time in manufacturing, supply chain management, and project management during pre-processing, processing, and post-processing stages. By comparing results against established benchmarks, they can determine where inefficiencies exist.

Reducing lead time can streamline operations and improve productivity, increasing output and revenue. By contrast, longer lead times negatively affect sales and manufacturing processes.

Key Takeaways

  • Lead time measures how long it takes to complete a process from beginning to end.
  • In manufacturing, lead time often represents the time it takes to create a product and deliver it to a consumer.
  • Lead time is calculated by adding any combination of the number of days to procure materials, manufacture goods, and deliver finished products.
  • Factors that can impact lead time include lack of raw materials, breakdown of transportation, labor shortages, natural disasters, and human errors.
  • In some cases, companies can improve lead times by implementing automated stock replenishment and just-in-time (JIT) strategies.

Watch Now: What Is Lead Time?

Understanding Lead Time

Production processes and inventory management can affect lead time. In regards to production, building all elements of a finished product onsite may take longer than completing some items offsite. Transportation issues can delay delivery of necessary parts, halting or slowing production and reducing output and return on investment (ROI). 

Using locally sourced parts and labor can shorten lead time and speed production, and offsite sub-assemblies can save additional time. Reducing production time allows companies to increase production during periods of high demand. Quicker production can increase sales, customer satisfaction, and the company’s bottom line.

Efficient inventory management is necessary to maintain production schedules and meet consumer demand. Stockouts occur when inventory, or stock, is unavailable preventing the fulfillment of a customer's order or product assembly. Production stops if an organization underestimates the amount of stock needed or fails to place a replenishment order and suppliers cannot replenish materials immediately. This can be costly for a 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.

A great example of lead time is the time needed to process a passport. If you're planning on traveling internationally, prepare to get your passport renewed months in advance of your trip; the government estimates the lead time for routine passport processing as 8 to 11 weeks.

How to Calculate Lead Time

Lead time can be broken in several different components: the pre-processing, the processing, and the post-processing. These may be defined or stated differently, but the general formula to calculate lead time is:

Lead Time = Pre-Processing Time + Processing Time + Post-Processing Time

For a manufacturing company, the pre-processing time is the procurement stage where raw materials are sourced and delivered to its manufacturing headquarters or processing plant. The processing time is the manufacturing stage. The post-processing time is the stage of processing the order and delivering the final good to the customer.

Lead Time for Manufacturing Company = Procurement Time (for raw materials) + Manufacturing Time + Shipping Time

For a retail company, there is no manufacturing time as the retail firm does not manufacture its own good. In addition, the procurement time is different as instead of procuring raw materials, it sources final products to then sell directly to customers.

Lead Time for Retail Company = Procurement Time (for final products) + Shipping Time

Lead Time and Supply Chain

The 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.

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.

Stockpiling necessary parts may be cost-prohibitive, but reducing the number of surplus parts also helps place a ceiling on production costs. One solution is for companies to use kitting services to organize 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.

Using offsite assembly in overseas markets instead of shipping completed goods can help companies save money on tariffs.

The Importance of Short Lead Time

Short lead time is important as it impacts the financial, emotional, and operational aspects of a company and its relationship with its customer. Several specific examples of the importance of short lead time include:

  • Shorter lead time may lead to happier customers. At its core, lead time is the concept of getting a good to the customer the fastest. Once a customer places an order, they most often do not want to wait unnecessarily long periods of time. When lead time is short, customers get their product faster and will likely have greater customer satisfaction in their buying experience.
  • Shorter lead time may lead to less obsolescence. Goods with long lead times run the risk of obsolescence by the time they are manufactured. When a product has a short turnaround window, the company runs a smaller risk of the good no longer being in demand by the time it is finished.
  • Shorter lead time may lead to less labor costs. If a company prioritizes reviewing its internal manufacturing process, it may cut out inefficiencies and eliminate unnecessary labor hours. This results in reduced costs and more efficient utilization of workers.
  • Shorter lead time may lead to more orders. If the market realizes one company has a shorter lead time, that company may end up with more orders especially if demand for its product is imminent. All else being equal, when two companies have a similar product, the market may be more likely to go with the company that can furnish the good faster.
  • Shorter lead time may lead to more efficient capital deployment. When cash is tied up in raw materials, it must wait to be processed into a finished good and sold before it gets converted back to cash. The longer this process, the longer the company is without capital it could be using to expand operations or strategically grow.

How to Reduce Lead Time

Though an entire manufacturing and distribution process may be complex with many stages, companies can take steps to reduce lead time and shorten the number of days for each process. Consider the following ways to reduce lead time:

  • Eliminate Unnecessary Processes. The easiest way to trim lead time is to eliminate steps or procedures that are not needed to facilitate a sale. This may mean sacrificing multiple reviews of quality control or assessing the efficiency of the manufacturing process.
  • Monitor Transportation Methods. Not all transportation methods are created equally, and some may simply be better options. This relationship is also not static; what may be ideal this month must change due to extenuating circumstances due to labor shortages, natural disasters, or government legislation. A company should always monitor what shipment methods it and its suppliers are using and see if there are preferable methods available.
  • Incentivize Better Service. Whether it is incentivizing external parties like suppliers or internal parties like employees, lead time may be reduced by setting targets/expectations and awarding those who meet those expectations. Though resulting in an additional cost to a company, the potential increase in sales quantity may outweigh the incentive or bonus payouts needed to move product faster.
  • Procure Differently. Some suppliers act more promptly than others; some suppliers may also be local and require shorter shipping expectations. When attempting to decrease lead time, a company should assess its current suppliers and see where there are efficiencies to be had.
  • Carry Higher Inventory. On one hand, carrying more inventory results in higher storage, security, and insurance costs and has a greater risk of theft or obsolescence. Alternatively, having inventory on hand allows a company to not need to wait for shipments to arrive.
  • Reorder More Often. If you don't want to carry more inventory, consider placing more frequent material orders. This may result in materials already being in transit before you realized you'd need them. Though you run the risk of ending up too much inventory on hand, the alternative is to preemptively plan excess inventory levels.
  • Promote Internal Learning. The internal manufacturing process is only as efficient as the laborers who know the process. By prioritizing cross-training and learning opportunities, companies may end up with stronger labor numbers with staff more knowledgeable and proficient about the process.

Types of Lead Time

There are three primary types of lead time; each must be considered in conjunction with each other to set overall expectations of a manufacturing process. Therefore, these three primary types often flow into a fourth type of aggregated lead time.

Customer Lead Time

The customer lead time is the amount of time between when a customer places an order and when the customer receives the product. This includes the time between when a customer places an online order and the company receives the order confirmation. Then, it includes the entire manufacturing process, shipping process, and delivery process.

Material Lead Time

The material lead time is the amount of time between when a company becomes aware of a need for raw materials and when the materials are physically obtained. Companies are often alerted by inventory management systems when orders are processed. This lead time may be influenced by information systems that notify management when current inventory levels are low. It may also be impacted by ordering, shipping, delivery, and fulfillment by suppliers.

Production Lead Time

Once materials have been received, the production lead time kicks off. This is the amount of time between when a company has all necessary resources on hand to manufacture a product and when it completes the manufacturing process. Unlike other lead times, this entire lead time should be internally manageable and depends on internal factors such as waste, labor, equipment efficiency, PPE availability, and machinery downtime.

Cumulative Lead Time

Lead times above may be aggregated to create a fourth lead time, and companies may track different cumulative lead times. For example, a company may be interested in the internal lead time (i.e. when raw materials are sourced to when the final product is manufactured).

Though it may seem bureaucratic, breaking lead time into the categories above helps a company identify the strong and weak points along the sale process.

Factors That Affect Lead Time

Analyzing the lead time formula for a manufacturing company, the factors that affect lead time can be broken into three categories: the procurement factors, the manufacturing factors, and the shipping factors.

Procurement Lead Time Factors

Procurement lead time factors all relate to the sourcing of raw materials for production. Well-established companies with strong relationships with suppliers may be less impacted by these factors; still, when relying to external companies, there is always the risk that lead time falters due to an external failure to deliver. Procurement lead time factors that increase lead time include:

  • The company is not yet aware what raw materials they need.
  • The company is slow to submit a purchase request.
  • The company does not have a select supplier for a specific raw material.
  • The company wishes to negotiate the price or term or the purchase.
  • The company has an elaborate inspection process for delivered goods.

Manufacturing Lead Time Factors

Manufacturing lead time factors are relatively all controllable for a company. This internal-only stage of the sale process means a company may change processes, personnel, or equipment to improve or worsen lead time. As opposed to the other two lead time factors, a company should have almost full discretion over the manufacturing lead time factors. These factors that result in longer lead times include:

  • The layout or location of the processing plant(s) is inefficient.
  • The company has inadequate power or utility service.
  • The company struggles to have sufficient and proficient laborers.
  • The company is unable to efficiently transfer finished goods to its warehouse for distribution.
  • The company faces government regulation impeding or slowing the manufacturing process.
  • Equipment failure or required periodic maintenance slow the production process.
  • The company awaits specialized or custom parts needed to manufacture a good.
  • The company must rework products due to lack of quality.

Shipping Lead Time Factors

When the finished product is sent to a customer, many factors are out of the hands of the company. Though the company can control how fast an item gets off the production line and onto a delivery vessel, a company is often at the whim of whatever delivery method they choose. These factors include:

  • The company selecting a slower, more cost effective method of delivery.
  • Natural conditions or weather impede the delivery process.
  • The company fails to collect accurate remittance information and must inefficiently redirect shipment.
  • The company mishandles the shipment and must prepare a more secure, safe delivery.
  • External factors such as disrupted supply chain management cause broad transportation issues.

Example of Lead Time

Imagine a large festival that takes place during the first week of August every year that attracts 100,000 people on average and typically sells 15,000 festival T-shirts. The vendor that supplies the T-shirts needs one business day to complete the shirt design, one business day to have it proofed and make any necessary fixes, one business day to print the shirts, and two business days to ship the items.

The lead time in this example would be five business days. In other words, the festival organizers need to place their order with the T-shirt supplier at least five business days before the opening of the festival in order to get the shirts on time.

Of course, that lead time can be shortened in some extreme situations if the buyer is willing to pay a premium. If T-shirt sales on the first day of the festival exceed expectations, festival organizers may decide to order additional shirts on the second day with the hope that they can be delivered by the third day.

Since the shirts have already been designed and approved, that means five days of lead time can be reduced to three. To meet that shortened lead time, the vendor would need to print the additional shirts as quickly as possible in order to ship them overnight for delivery the following morning.

Additional factors can affect lead time in this example. If festival organizers want a certain percentage of the T-shirts to be fuchsia and the vendor does not regularly keep fuchsia T-shirts in stock, that can increase the lead time because the vendor will need to order shirts in that color.

What Are the Types of Lead Time?

The main types of lead time are customer lead time, material lead time, factory, or production lead time, and cumulative lead time. The first three types of lead time are summed to arrive at the fourth type of lead time.

What Are the Main Components of Lead Time?

The main factors that make up lead time are preprocessing, processing, waiting, storage, transportation, and inspection. The factors are often compiled into the three main stages of an order: the before (pre-processing), the during (processing), and the after (shipping).

What Is Lead Time in Shipping?

Lead time in shipping is the period of time between when an order is first received and when it reaches the customer. It includes the processing of the order and then the time spent delivering a package. 

The Bottom Line

Lead time describes the amount of time it takes to complete a specific process. In business, lead time is often used to describe the amount of time it takes to process an order, manufacture a product, delivery a good, or a combination of these processes. Companies with shorter lead time may have less finished inventory on hand, more efficient processes that may cost less, and generally happier customers.

Article Sources
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  1. U.S. Department of State, Bureau of Consular Affairs. "Processing Times for U.S. Passports."