What is Lead Time?

As simple as we all want to believe the concept of lead time is, I believe there is a real disconnect between what we believe lead time is and what others believe it is.

Let me share a story from my past. I once worked for a company whose various teams were unable to agree on how to measure lead time:

The distribution team measured their inbound lead time from the date the order shipped until it unloaded.
The transportation team measured transit time (a subset of lead time) from the time the order shipped until it arrived in the destination yard.
Inventory management measured lead time from when they placed the order until the product was received and in the pick location!
Some vendors measured lead time from when they acknowledged the order until it shipped out their door.
Other vendors measured lead time from when they released the order to the warehouse to when the order arrived at our location.

Who was right? All of them, because each group had their definition of lead time.
Industry in general has a problem with the definition of lead time. Let’s look at a few examples from the Internet:

From Wikipedia:

“A lead time is the latency (delay) between the initiation and execution of a process. … A more conventional definition of lead time in the supply chain management realm is the time from the moment the customer places an order (the moment you learn of the requirement) to the moment it is received by the customer.

“Lead Time terminology has been defined in greater detail. The Supply Chain from customer order received to the moment the order is delivered is divided into five lead times.”

Order Lead Time: Time from customer order received to customer order delivered.
Order Handling Time: Time from customer order received to sales order created.
Manufacturing Lead Time: Time from sales order created to production finished (ready for delivery).
Production Lead Time: Time from start of physical production of first submodule/part to production finished (ready for delivery).
Delivery Lead Time: Time from production finished to customer order delivered.

From Investopedia:

“The amount of time that elapses between when a process starts and when it is completed. Lead time is examined closely in manufacturing, supply chain management, and project management, as companies want to reduce the amount of time it takes to deliver products to the market. In business, lead time minimization is normally preferred.”

From Merriam-Webster:

“The time between the beginning of a process or project and the appearance of its results.”

Holy Moley! Can’t we make up our minds?

I am of the school that says lead time should include everything from the point I make the decision to buy to the point it is back on the shelf, ready for the customer to buy. Following that line of thinking, lead time should include:

The time it takes me to review the reports
The time it takes to do analysis to estimate the demand
The time it takes to create the purchase order
The system’s processing time to create and send the purchase order
The vendor’s processing time, inclusive of their:
- Order entry
- Manufacturing time
- Fulfillment time
- Packing time
The time in transit
Receiving time at my distribution center
Inspection, if that is part of the everyday process
Pre-pack time, if we are pre-packing before stowing the goods
The time it takes for me to get the goods stowed on the shelf

Some folks will call that effective lead time (not kidding), not to be confused with all of the other kinds of lead time.

I hear a variety of reasons why different companies — or different departments in the same company — use different definitions. Not to overuse the bullet-point lists today, but here is a partial list of these reasons:

It is too difficult to measure the whole process.
Our systems don’t support it.
We can’t control the (vendor, carrier, DC, fill in the blank).
Nobody pays attention to it.
We have too many vendors, DCs, customers.
Our (DC, Factory, Vendor) wants to track only what they control.
There are too many threads to track.
My boss wants just a rolled-up number.

Why Measure Lead Time?

Lead time is one of the measures used to calculate safety stock, the extra inventory that we carry to make sure that we do not run out of stock. Lead time is just one of two variables in the calculation; demand is the other variable. I look at the relationship between demand and lead time like the relationship between two sisters — you have to understand the context.

Many people argue that demand is rarely predictable, and that is why many companies invest mightily in predictive analytics to forecast demand. But I have seen examples of rock-stable demand and crazy lead time variance.

Low demand leads to crazy variance in demand. Long lead time can lead to crazy variance in the lead time. Figuring out which of the sisters is the crazy one — demand, supply, or both — changes the way you calculate safety stock. Of the two variables, lead time may be the more controllable, depending on how much effort the supply chain manager is willing to make.

Next, we start looking at ways to modify that variance.

Messy Inventory

Variability of Demand