10 min read
Jan 17, 2021
Inventory Management

What Is Lead Time in Inventory Management? Should You Be Worried If It’s High?

Are your warehouse operations costing you too much? Are you experiencing frequent outages for in-demand products? Are you worried about excessive stock accumulating in your warehouse?

H.S..
Harshit Srivastava Sr. Content Analyst

If you’ve answered yes to any of these questions, the root cause may lie in high lead times. To fix the issue, you’ll need to understand the concept of lead time, the factors that affect it, and the measures that can reduce it.

In this article, we’ve included all the information about lead time you’ll need to run your inventory smoothly. We’ve also provided some actionable steps that’ll help you solve the problem of high lead times.

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What is lead time in inventory management

Lead time is the amount of time you need to complete a process. For example, while getting groceries, the lead time will include the time it takes you to make a list of items, drive to the store, choose the items and pay for them, and drive back home.

Similarly, in the context of inventory management, lead time refers to the time it’ll take you to procure an inventory item, from the time a supplier processes your order to the time it takes to ship the items to you.

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An example of lead time in inventory management

Let’s suppose Sam’s a retailer dealing in air conditioners of different brands. After certain units of a brand are sold, he needs to place an order with the supplier to replenish his stock, else he won’t be able to complete customer orders. 

Once Sam places the order, the supplier performs a series of tasks before handing over the consignment. The time required in executing the order can be divided into two parts:

Reordering time: When the supplier receives Sam’s order, some time will be needed for processing it. This time includes data entry, paperwork, approvals, contracts, etc.

Supply time: After the supplier processes the order, logistics will come into view. Supply time is the duration it’ll take the logistics team or transporter to ship the order to Sam.

At the end of the process, Sam will receive his complete consignment. Since Sam needs to wait for both order processing and delivery, the lead time will be the sum of reordering time and supply time.

Lead time = Reordering time + Supply time

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Factors that affect lead time in inventory management

Let’s hold on to Sam’s example and look at the factors that can affect the lead time in his case:

Order processing delays: Sometimes a supplier might be unable to process the order on time owing to reasons such as technical issues at the supplier’s side or the unavailability of an approving authority. Such instances increase the reorder time and therefore the lead time.

Stock outages at the supplier’s end: Sometimes the supplier might run out of stock on the ordered items. In such a case, it’ll take more time to complete the order, thereby prolonging the processing time and the lead time.

Time-consuming processes at the supplier’s end: Sometimes, inefficient processes on the supplier’s side could cause delays. For example, if the supplier tracks incoming orders manually using spreadsheets, any error in data entry will delay the order, increasing the lead time for Sam.

Supplier’s policies: At times, certain policies on the supplier’s side may also impact the processing time. For instance, if the supplier only ships orders only on Mondays, Sam may have to wait longer than usual to procure his inventory stock.

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Tool to calculate and track lead time

To help you calculate the reordering time, supply time, and lead time for your orders, we’ve created a lead time calculator tool. You need to enter the item name, date of order, expected date of delivery, date of order processing, and the actual date of delivery, and the tool will calculate reordering, supply, and lead time, along with delay from lead time.

Want to see what the lead time is in your business?

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How high lead time impacts your warehouse operations

High lead time impacts your inventory operations negatively for the following two reasons:

High inventory costs: If your inventory lead time is high, you’ll need to wait longer to procure inventory. For this reason, you’ll need to stock up your inventory with more items to meet customer demand. This leads to increased storage costs for inventory.

Greater risk of stock outages during increased demand: Whenever there is a sudden increase in product demand, you’ll need to restock your inventory quickly. In such situations, longer lead times limit your ability to procure stock promptly, thereby risking product outages.

For these reasons, you must try to reduce lead time in your warehouse.

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How to reduce lead time in inventory management

Reducing lead time kills two birds with one stone: while you’ll save on the carrying costs spent on storing excess inventory, you’ll also be able to handle sudden surges in demand comfortably. Following are the steps you should take to reduce lead time:

Opt for local suppliers: The farther the supplier, the more time it’ll take for the product to reach you. Especially, when your supplier is located abroad, it can take a lot of time to procure the order. In this scenario, opting for a local supplier will help you ensure faster procurement, thereby reducing the lead time.

Incentivize your suppliers: Rewarding on-time or before-time delivery can motivate your suppliers to complete their orders on time. A simple way of doing so is to add a lead time clause in your contracts that provides for an optional bonus for timely stock delivery. However, since incentives can add to your business costs, we recommend adding this clause only for the suppliers delivering high-demand items.

Pay your suppliers timely: Trust is a two-way street. If you don’t pay your suppliers timely, they’ll also be less likely to complete procurement orders in time. For this reason, making timely payments to your suppliers can help you improve the timeliness of your orders.

Share demand forecast with your suppliers: If your suppliers know your upcoming orders, they’ll be better prepared for future orders. This increases the chances that your suppliers will be able to complete orders on time, especially during periods of high demand.

Use a software solution for managing inventory: Inventory management systems enable you to digitize the entire inventory process, thereby improving the efficiency of inventory processes. The software lets you forecast demand using factors such as current and historical sales, which helps you minimize the instances of product outages. It also enables you to automate the stock reordering process, thereby saving time on creating reorder requests manually.

Managing inventory orders in Zoho Inventory

Managing inventory orders in Zoho Inventory (Source)

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Selecting an inventory management solution for optimizing lead time

If you want to reduce lead time with the help of an inventory management solution, you should opt for an inventory management solution that offers the following features:

Demand forecasting: Forecasts product demand in the coming months based on several factors, including category, historical sales data, and seasonality trends. With this functionality, you’ll be able to provide accurate demand forecasts to your suppliers, thus increasing the probability of timely delivery during high-demand periods.

Supplier management: Enables you to manage communication with your suppliers. Also sends you email or text notifications before each appointment, so that you don’t miss any scheduled meeting. This functionality allows you to ensure timely communication with the suppliers, helping you build reliability and trust.

Order management: Allows you to manage inventory orders in your warehouse. You can also automate reorders, thereby saving time and effort spent on creating orders manually.

GetApp’s inventory management software catalog can help you simplify your software search. On this page, you’ll be able to shortlist software solutions based on business size, ratings, integrations, and features, and arrive at a list of possible solutions. You can also read reviews from other businesses like yours and analyze the pros and cons of the software.

Note

The applications selected in this article are examples to show a feature in context and are not intended as endorsements or recommendations. They have been obtained from sources believed to be reliable at the time of publication.

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