If you want to maintain an efficient inventory and keep the right amount of product on the shelves, you have to know your lead time. It doesn’t matter if you carry 10 or 1,000 products; you must know your lead times to succeed. Maintaining accurate lead times will help avoid stockouts and keep your customers happy.
First thing’s first. This is not your vendor’s lead time. Lead time is the time it takes to go from creating a PO to when the item is available in your inventory.
Secondly, avoid the mistake of calculating lead time based on a straight average. That will almost always be too low. If you’re experiencing short, frequent stock-outs, that may be your problem.
Calculating Lead Time
Simply put, this is the amount of time it takes to replenish a stocked item’s inventory. Sounds easy, right? With the right tools and information, it will be.
Each product, warehouse, and supplier combination will have its own lead time. You’ll need to know how many days it takes to:
- place an order once you receive a trigger to do so
- have the item to be processed by the vendor, shipped, and delivered to your door
- unpack and inspect your shipment and receive it into your inventory system
All of the above factors will affect your lead time.
Factoring in reordering delay
Some suppliers may accept orders only a few times a week or month. Buyers need to anticipate this delay in delivery to maintain safety or buffer stock. When calculating your lead time, it may be necessary to add a week or two to stretch your inventory to ensure you can make it to and past the date you can place an order with your supplier.
Why a straight average won’t cut it
If you calculate lead times based on a straight average, you’ll most likely get inaccurate results. For that reason, your lead time should be based on the maximum reasonable lead time for a given product. This ensures you cover all your bases and give yourself and your supplier a fair amount of time to get a shipment. Straight averages are too short 50% of the time and too long the other 50%.
If your lead time for a product ranges from five to six weeks, set the anticipated lead time to 42 days. Planning for the longest reasonable lead time will save you from some moments of panic and make sure you’ve got a product to sell at all times.
Dealing with unusual lead times
A sound inventory management system will alert you when lead times are unusually long or short by comparing the lead time of the most recent shipment with the anticipated lead time for that item.
Jon Schreibfeder of Effective Inventory Management notes these examples of a significant difference between anticipated lead times and unusual lead times:
- The lead time for the most recent stock receipt is less than 50% of the current anticipated lead time. For example, the anticipated lead time for a product is ten days, and the actual lead time associated with the latest stock receipt is less than five days.
- The lead time for the most recent stock receipt is more than 50% greater than the existing anticipated lead time. Perhaps the anticipated lead time for a product is again ten days, but the actual lead time associated with the latest stock receipt is more than 15 days.
- The lead time associated with the latest stock receipt is more than a week greater or a week less than the existing anticipated lead time.
You should contact the supplier when you identify an unusual lead time. If it is unusual and won’t affect future shipments, no action is necessary. However, if it turns out to be a good predictor of future shipments, the lead time needs to be updated in your system.
Not Rocket Science
Calculating lead times shouldn’t be rocket science, but it does require some analytics and data management to create an effective system for reordering items. With the correct data and some system monitoring, you’ll be able to run an effective inventory management system, regardless of your size.
