Inventory Management 101: Lead Times for eCommerce Businesses

June 14, 2022
Table of contents

What is Lead Time?

Lead time is the time that passes from the initiation of the production or processing of an item to its conclusion, when the product is delivered to the customer.

Examples of lead time include:

  • The amount of time it takes for your warehouse to receive an order of raw materials
  • The amount of time it takes for a customer to receive an order after placing it

Lead times can provide a measure of how quickly your business is getting items to customers. They can help you understand the efficiency of your supply chain and the efficacy of both internal and external procedures.

You will likely have different lead times in different areas of your business. For example, you may separate manufacturing and processing lead times to understand how long it takes to complete tasks in each separate segment. This can allow for a more specific analysis of your business.

Different types of lead times include:

  • Material lead time: the amount of time required to receive raw materials from suppliers
  • Production lead time: the amount of time required for an item to be produced
  • Customer lead time: the amount of time required to fulfill a customer’s order
  • Cumulative lead time: the amount of time required for the entire production and fulfillment of an item, from acquiring raw materials to shipping the final product

Why Long Lead Times Are an Issue

Why should you care about your lead times? Simply put, long lead times can destroy your business. No matter how incredible your product is, you must be able to deliver it quickly and reliably to buyers. Failing to do so may cause lost sales, angry customers, and a negative brand reputation.

Lead time issues can also be an operational struggle. Without a good understanding of where your stock is located and when it will arrive at your facilities, it can be difficult to make predictive decisions. This can negatively impact inventory turnover rates, tie up money in inventory, and result in lost profits.

Types of Lead Time

We briefly covered a few different types of lead times above. Now, let’s dig more deeply into these four most common lead times.

Material Lead Time

Material lead time describes the amount of time it takes for raw materials to be delivered to your manufacturing location. Knowing the lead times of all necessary raw materials will help you make purchasing decisions.

With the supply chain issues COVID-19 has caused, it’s become increasingly difficult to source raw materials. Making purchasing decisions in advance can help you ensure that you’ll have the raw materials you need to build the units your customers are demanding.

Production Lead Time

Production lead time refers to the time it takes for a factory to produce products, and for those products to then arrive at your warehouse. This value can be useful if you don’t use raw goods, and therefore don’t need to know the material lead time.

Customer Lead Time

Customer lead time is one of the most powerful metrics you can understand as a business owner. It refers to the time between when a customer places an order and when they receive it. Minimizing this value allows you to keep customers happy, and to understand the overall efficiency of your current operations.

While other lead times may be reliant on third parties, such as suppliers, you have control over your customer lead time. It’s a direct reflection of your shipping processes and inventory management strategy.

Cumulative Lead Time

The cumulative lead time looks at the total lead time required to produce and deliver products to customers. It’s the sum of material, production, and customer lead times. Looking at this overall value can help you understand how efficient your business is at a holistic level. As your lead time includes every aspect of producing and processing inventory, it’s essential that each individual lead time is minimized.

Depending on your business position and goals, you may prioritize certain lead times. However, each one is an essential part of propelling your business forward. To understand which lead times are most important to your business, ask yourself the following questions:

  1. How long does the average customer wait for their order?
  2. What are most customer complaints about?
  3. How reliable are my raw-material suppliers?

How to Calculate Lead Times

The calculation for lead time is simply the sum of each time frame in the production process. For example, the formula for total lead time is as follows:

Total lead time = material + production + customer lead times

Calculations for each individual lead time involve adding up the time it takes for each specific function to be completed.

For example, the formula for production lead time is as follows:

Production lead time = pre-processing + processing + post-processing times

How to Shorten Lead Times

Given how much each individual business varies, there’s no one way to shorten lead times. However, there are several approaches most companies can consider:

  • Maintain a leaner warehouse with the “just in time” inventory strategy.
  • Look to cut out middlemen. If your inventory travels to multiple facilities and is processed several times before reaching your warehouse, look for ways to directly collaborate with suppliers instead.
  • Identify consumer trends and only purchase necessary stock. Several factors, such as seasonality, may impact the sales of certain items.

Shorten Lead Times and Increase Efficiency With Shypyard

Minimizing lead times is an essential part of ensuring proper inventory management and business growth. Understanding your business’s current position and taking steps to minimize lead times can help guarantee customer satisfaction. To stay ahead of the competition and simplify KPI tracking, consider Shypyard’s Integrated Business Planning solution.