Lead time, definition and formula

Lead time, definition and formula

By Joannès Vermorel, last revised November 2014

The lead time is the delay applicable for inventory control purposes. This delay is typically the sum of the supply delay, that is, the time it takes a supplier to deliver the goods once an order is placed, and the reordering delay, which is the time until an ordering opportunity arises again. This lead time is usually computed in days.

Lead time has very distinct meanings depending on the industry being considered. In this page, we are looking at the lead time from the inventory control angle, i.e. as one of the key factors that needs to be taken into account for inventory optimization. This angle is typically most useful for retailers and wholesalers.

Supply delay

In most businesses, inventory cannot be instantly replenished by a supplier. Hence, in order to guarantee that the frequency of stock-outs remains sufficiently low, the demand planner needs to anticipate how much inventory will be consumed between now and the next replenishment, assuming that an order is made right away. Indeed, while goods are in transit, inventory will gradually get depleted.

Let's review a few examples that are typical in supply chain management:
  • 1 day of supply delay for next day delivery for stores replenished by a regional warehouse.
  • 1 week of supply delay for a wholesaler ordering from a local producer.
  • 3 months of supply delay for a manufacturer producing in Asia and having a warehouse in Europe or North America.

Reordering delay

A common mistake found in lead time calculation is to omit the reorder delay. Indeed, if a shipment takes 3 days to be delivered from a supplier, but reordering from the same supplier is only carried out once a week, the inventory ordered on Monday 1st of any month is not just supposed to last until Thursday 4th (3 days ahead), but until Thursday 11th (10 days later - 7 days of reordering delay + 3 days of supply delay), since no additional reorder will be made between Tuesday 2nd and Sunday 7th.

In food retail, it is frequently observed that some suppliers only accept orders certain days of the week. In such situations, it must be noted that the reorder delay will vary depending on the day when the reorder is made. For example, if a supplier accepts reorders only on Mondays and Wednesdays, the reorder delay on Monday is 2 days, while the reorder delay on Wednesday is 5 days.

Sum of supply delay plus reorder delay

The lead time is the sum of the supply delay and the reordering delay. The lead time is the applicable duration to calculate the lead demand, the safety stock or the reorder point through a direct quantile forecast.

The longer the lead time, the higher the total inventory level. Indeed, total inventory includes both stock on hand but also stock on order. Longer lead time also increases the dependence of any company making an order on forecasting accuracy. Indeed, when next day delivery is available, an erroneous order (too large or too small) can be fixed with 2 or 3 days by applying corrective measures. In case of overseas shipments, incorrect orders can penalize the company for 6 months or more.

Varying lead time

The classic safety stock model assumes that lead time is a constant that gets factored into the calculation of the optimal reorder point. In practice though, lead times, when measured, are typically varying.

However, there is a frequent misconception about the impact of the variations in lead time on, say, safety stock calculation. The only variations that matter are the unexpected variations. If the lead time is varying in a perfectly predicable manner - for example, the supplier delivers in two business days instead of two calendar days - then this variation in itself has no impact on any inventory control calculations. All calculations of lead demand, safety stock and reorder points, should just leverage the correct lead times which change over time.

The only lead time variations that need to be accounted for, as far as inventory control is concerned, are the unexpected variations, typically caused by an increase in the supply delay due to a stock-out experienced by the supplier itself.

Measuring the supply delay

Since the reordering delay is usually driven by the reordering company itself, there is little or no uncertainty on this value. However, expected variations are anticipated to happen for the supply delay. Thus, it is usually important to keep track of the supply delay for each order and delivery. First, it allows to keep an eye on supplier performance; second, it allows to fine-tune inventory levels.

Lokad’s gotcha: We have witnessed that some businesses do not properly match orders with deliveries. As a result, for items that are ordered every day or so, when items are received, it is unclear whether the items received today are the items have been ordered the day before, or if it is a late delivery from an earlier reorder. A precise matching between reorders and deliveries is the key to measuring the supply delay, and consequently the lead time, in order to be able to construct a supplier scorecard as a result.

Further reading

Get optimized sales forecasts with our inventory forecasting webapp. Lokad specializes in inventory optimization through demand forecasting. Lead time management - and much more - are native features of our forecasting engine tool.