Lead Time Formula
An important part of inventory planning entails working with a lead time formula to ensure your business maintains sufficient quantities of inventory on hand to meet demand while awaiting arrival of reordered items.
In simplified terms, the lead time calculation is the time it takes to receive an order after that order is placed.
If you are on the ordering side of the transaction, you want to know how long it will take from the time you hit the send button on your order until the order will be delivered to your door. On the receiving side of the transaction, there’s a bit more going on behind the scenes. The recipient’s definition of lead time includes the time it takes to process the order (reordering delay) plus the time it takes to create, package, ship and deliver that product to your door. Displayed as an equation, the lead time formula looks like this:
Supply Delay + Reorder Delay = Lead Time
Now, what if you place your order after 3 pm on a Friday and your supplier won’t get around to processing it until Monday? When you place your order may impact the lead time and you must keep that in mind when ordering to calculate your order amounts correctly. If you don’t take the reorder delay into consideration, you could end up short of product on hand before replenishment arrives.
Inventory Lead Time in Volatile Markets
Your lead time can be a benefit or a handicap. When everything is going smoothly, your supplier delivers on time, and you can fill orders in time to keep customers happy. But when supply chain disruption becomes completely unpredictable, the way it has through the pandemic, lead time drags out – sometimes to the breaking point – putting your business in a position of losing sales, pausing production or shutting your doors.
We’ve seen just how extreme supply chain disruption can be and how important inventory management lead time is to the whole equation for running a business successfully. In this time span, many companies have experienced:
- Hold-up at customs
- Ships held up at port
- Suppliers lacking workers
- Labor shortages
- Increased costs (tariffs)
- Material shortages
So, what steps can you take to synchronize purchase orders with demand to make sure your order behavior best fits your company’s needs? Relying on SOS Inventory is a great first step. You can automate the reorder process by triggering it from reorder points set for minimum order quantities.
Shortening lead time any way you can will assist in faster delivery of your product to your customers. As more and more consumers have turned to online ordering, they’ve come to expect fast delivery and when you are out of stock, it’s easy enough for them to find another source online that does.
The inventory lead time formula is a fundamental piece of your overall operating plan. SOS Inventory can make every aspect of the inventory management process easier and give you greater control over costs and quantities so you can identify areas for improvement and work to make your business more efficient and profitable.
