What is Lead Time in Inventory Management System?

When it comes to inventory and its management, there are a lot of things to be taken care of and lead time is one of those things.

There are many important factors that play an important role in effectively managing the inventories of an organization, viz. SKU, automated systems, accounting, safety stock, lead time, etc.

In this short article, we will understand more about what is the lead time in the inventory management system.

First of all, let us have a quick overview of the Inventory Management system.

Inventory Management is the process of storing, ordering, utilizing and selling the stock of a company through the inventory. It includes the management of the raw materials required, finished products, purchase items, warehousing and processing of such items from the inventory system.

In short, we can say that Inventory management is the entire process of managing the inventories of a company from purchasing raw materials to the final delivery product. Such inventory management efficiently streamlines the entire process and avoids any shortages in the supply chain cycle.

Lead Time

Lead Time is the total time elapsed from the time when the order is received to the total time taken to deliver the final product. For example, if you need to calculate the lead time for a manufacturing company, then you need to observe and study the entire process of manufacturing the final product.

Here you will be needed to record the time when the order is received from the sale steam, then the estimated time required to purchase the raw materials from time to time during the production. After the production is complete you have to estimate the time required for all the aesthetic works like buffing, painting, packing, etc.

Once everything is completed, the time for delivering the product to the customer is also recorded. And combining all these processes, studying all the variables in each and every step gives you the exact lead time for an order to complete.

The same is the case with the lead time for the inventory system, the fact is that here we are just thinking for the lead time for the stocks in the inventory and not the entire production process.

Apart from this, lead time also impacts the number of stocks that need to be held at any point in time.

How to Calculate Lead Time

To calculate the lead time, all you need is just two things, one is to determine the supply delay and the next one is to determine the delay in re-ordering the stocks.

And when you will sum up these two, you will get the estimated lead time for your inventory management system.

And hence, the basic and simple formula to calculate the lead time is –

Lead Time = Supply Delay + Reordering Delay

 

Impact of longer Lead Time

If the lead time for a company is longer than what is expected, then the company has to keep stocks in reserve and have to bear the extra cost to store the said inventories.

It also affects the agility and adaptability of the business you are in, having a longer lead time often forces the company to spend more on purchasing the same product, which creates a barrier to introducing new products and trying out new ventures in the business.

In short, having a larger lead time causes huge losses in the business and that is why the focus should be given on how to lower such lead time in your inventory management system.

How to shorten it?

Your first priority while shortening the lead time should be to understand your supply chain system thoroughly from start to end so that you can understand exactly where your inventory management is lacking and causing the delays.

You need to study it and create a document or a chart to monitor the entire process of your inventory system. Here are some of the major factors that can help you to minimize your lead time –

Frequency and Volume of Orders –

In order to take control of your inventory and shorten the lead time, you must increase the frequency of ordering and decrease the volume of stocks you order.

Let us understand it in simple words, instead of ordering a large number of inventories, order a minimum number of stocks at regular intervals which will keep your inventory moving and avoid any lead time in the entire process.

Incentives for suppliers –

Offer your suppliers additional incentives or bonuses for timely delivery of your products. This will provide a pace in your supply chain system and will definitely lower the risks of longer lead times.

Automation –

It is the best way to monitor your entire system and supply chain process. Utilize an automated system to manage your inventory, so that it will track all the real-time events in the process and will minimize the delays and shortcomings.

Vocal for Local –

If you are still finding it difficult to shorten your lead time, find a local supplier or a distributor who can deliver your items quickly without any extra charges or any extra time.

This is the safest and a proven method to minimize the lead time from the traditional times, it works every time you go to a local vendor. But in some cases, you might have to opt for a supplier from another location or even a country and in that case you need to closely monitor the entire supply chain.

So, here we discussed some of the most important points regarding the lead time and some other factors related to what is lead time in the inventory management system.

If you want to learn more about lead time and inventory management systems you can visit Zapinventory and understand each topic related to inventory management in detail.