Delivery lead time is the time between when an order is placed and when it is delivered. If abusiness knows how long a delivery lead time will be, it can use that information —and itsknowledge of when it need to receive something — to figure out when to place an order.Allthe processes that enable an order to be delivered affect delivery lead time, includingdesign work, production, quality control, packaging and shipping.
What Is Delivery Lead Time?
Delivery lead time measures the period between when an order is placed and when it’sdelivered. It is important in supply chain management and can be aparticularly useful metric in managing inventory and logistics.
Delivery lead times are relevant in three supply chain situations. First, they provide asense of the timing of inbound orders — that is, how long it will take for purchasesfrom asupplier to arrive. Understanding the delivery lead time from upstream suppliers isessential for inventory planning andsupply chain management.
The second important type of delivery lead time relates to outbound or downstream deliveries— or how long it takes to get an order to a customer. Not every business has customersforwhom delivery lead times will influence decisions, but for those who do, this type ofdelivery lead time is critical.
Internal delivery lead times are a third consideration. Not every supply chain transactionoccurs with an external party. Delivery lead times are just as important to businesses thatown and operate the different pieces of the supply chain — for instance, the factory aswell asthe warehouse.
Design and production processes aren’t the only factors that affect delivery leadtimes; other factors include suppliers’ available capacity, their geographic locationand logistical constraints, and the volume of the order. Sometimes price can be anotherfactor in a delivery lead time, in the case of a one-time rush job for a customer who iswilling to pay extra, for instance.
Delivery lead time vs. lead time: “Lead time” is a more generalterm than “delivery lead time”. Lead time can refer to the time betweeninitiation and completion of just about anything — for example, the lead time fororderinggifts so they’re available for a holiday, securing tickets for a Broadway show ormaking sure one has a turkey for Thanksgiving. All delivery lead times are lead times, butnot all lead times are delivery lead times. Nonetheless, the terms are often usedinterchangeably.
Key Takeaways
- Delivery lead time is the period between when an order is placed and when that order isdelivered.
- Delivery lead time tells a company how far in advance it needs to place an order for thedelivery to arrive on time. It is one of the most important metrics for managing supplychains and inventory.
- Lower delivery lead times are usually better, especially with perishable inventory,though some techniques for reducing lead times come with trade-offs.
- Delivery lead times are mostly discussed in the context of when a business needs toplace its order with a supplier, but they also apply to how quickly customer orders canbe fulfilled and how quickly a business can move materials and products around in itsown internal supply chain.
Why Is Delivery Lead Time Important?
Knowing the delivery lead time is a crucial part of inventory management, as there are costsand risks associated with having too little or too much inventory on hand. Delivery leadtimes become even more important with perishable goods, partly because of the risk that rawmaterials could spoil, rendering inventoryobsolete. And even if a shipment delay doesn’t render inventory worthless, theinventory’s useful life could decline in transit. Time spent in transit — acomponentof delivery lead time — can mean a shorter shelf life.
If orders rise to a level that can’t be fulfilled, customers may lose patience,complain or perhaps take their business elsewhere. Having a clear understanding of deliverylead times and open communication channels can lead to providing accurate answers and tomore satisfied customers.
How Is Delivery Lead Time Calculated?
The simplest way to calculate delivery lead time for a finished order is to compare when itwas delivered against when it was ordered. To estimate the delivery lead time of a futureorder, look at similar past orders and assume that the average elapsed time will be close towhat will transpire with the upcoming order.
Another way to determine the delivery lead time for a future order is to identify all thesteps involved in the order’s successful completion, attach times to those steps andthen add them together. This approach — called the addition method and discussed indetail,below — is especially useful when something about operations or logistics is differentenough that the past experience becomes unreliable as a model.
How to Calculate Delivery Lead Time
The math of delivery lead times isn’t complicated. Below are the two main ways to do itand the calculations for each.
Subtraction or empirical method. The subtraction method allowsprecise calculation of delivery lead time for a specific instance. It’stop-down and backward-looking, and relies on two data points: when the order wasplaced and when it was delivered. Here’s the formula:
Delivery lead time = (when orderwas received) - (when order was placed)
First, decide what units of time to express the answer, then input data for the twovariables accordingly. For business processes where time of day isn’trelevant, days may be used as the unit of time, thus avoiding false precision andunnecessary noise. For instance, if a supplier’s trucks go out at 8 a.m. eachmorning, it doesn’t matter whether an order is placed at 8:05 a.m. or 4:30p.m. In such a case, the delivery lead time would be expressed in days —“1day,” “3 days,” “5 days” — not hours. For othertypesof orders, days might not be a granular enough measure. Some office supply deliveryservices measure their delivery lead times in hours and minutes, all butguaranteeing orders will be fulfilled on the same day they’re placed. If abusiness is hiring a construction company to build its new headquarters, on theother hand, it will likely measure that delivery lead time in months.
Of course, delivery lead times can change between orders. If a customer is orderingsubstantially more of something than it has in the past, or if the supplier’sproduction capacity is already stretched when the order comes in, the delivery leadtime could well be longer.
Addition or component method. This second method is more bottom-upand gets an answer by assembling components. It can be built from actual data from asingle transaction or from averages across multiple transactions. It can even be atheoretical calculation using assumptions as inputs.
To employ this approach, estimate the time needed for each sequential process thatmoves the transaction from the order-placed stage to the order-delivered stage. Notevery business, product or transaction will have the same process list, soit’ll need to customize it. Design is a common input and so is processing orcycle time, which is the period required for a worker to produce one unit of aproduct. Other common inputs are production, quality control, order packing,packaging, assembly and delivery logistics.
To successfully use the addition method, make sure that, first, all of the importantcomponents are factored in. If unfamiliar with the processes, seek out moreinformation. Missing an important step could result in an overly optimistic estimateof the delivery lead time, leaving a business without inventory when it needs it.When determining delivery lead time from a supplier, the business won’tnecessarily have access to all the pertinent information. In that case, it may needto ask the supplier directly or use the subtraction method with recent data, if ithas worked with the supplier in the past.
The second thing that must be done is subtract the time for processes that can beperformed concurrently. Suppose the business is calculating the delivery lead timeon an order of custom water bottles for a corporate event. The three main stepsmight be: making the water bottles, getting the design properly programmed into themachine that prints logos on the water bottles and printing the logos on thebottles. Suppose it takes two days to make the water bottles and one day each forthe other two steps. But if the printing machine can be programmed while the waterbottles are being manufactured by a different machine, steps one and two can be doneconcurrently. In that case the business would only need three days, plus shippingand handling time, not four.
Said another way, using the addition method requires not only an understanding of thesteps but also the dependencies — the order in which things have to happen andwhether any steps can happen simultaneously.
The addition formula is usually written like this:
Delivery lead time = (sum of timesto complete each step) - (total time saved from overlapping work)
To use the formula for a particular calculation, make a list of the components thatare most important to the situation and enter realistic numbers.
The steps in the addition method are as follows:
- Identify all activities that must be completed between order receipt and orderdelivery. Leaving anything out will result in underestimates of delivery leadtimes.
- Estimate how long each of the activities will take. The timing of the order maymatter here. The estimated lead time for an order placed around Christmas willlikely be different than for an order placed in June.
- Identify which order-filling activities will happen concurrently, and how muchtime will be spent on those overlaps. Missing something here will result inoverestimates of delivery lead times.
- Add up time estimates and subtract time spent on overlapping activities. Theresulting number is the delivery lead time.
Delivery Lead Time Examples
The subtraction method works well when working with a supplier you know well, and thesupplier has no obvious capacity constraints. We’ll use the example of an electronicsretailer to illustrate it.
This retailer is expecting an influx of business from a conference that a nearby collegecampus is hosting. Specifically, the retailer expects to sell a lot of clickers that advancePowerPoint presentations remotely. The longer the retailer waits to place the clicker orderwith its supplier, the more information the retailer will have about the number ofconference attendees. But the retailer also does not want to wait too long to order and risknot having the needed supply of clickers when the visiting academics are in town.
The retailer looks at its records of orders and deliveries. The last order it placed forslide clickers was on October 7, and it was delivered October 12; that’s five days. Tobe safe, the retailer performs the same calculation on the last four deliveries and getsfive days, six days, five days and four days. The retailer reaches out to its supplier, withwhom it has a good relationship, and asks if the slide clickers are readily available, orwhether there are any delays or back-orders that could affect delivery lead times. Afterbeing assured that there’s no looming problem, the retailer decides to place the orderseven days in advance. That is as long as it has taken at any other point in recent months,plus one additional day of buffer time.
To illustrate the utility of the second method — addition — we’ll useanother exampleof a preexisting customer-vendor relationship, but this time involving an unusually largeorder. The vendor in this case is a furniture maker. It has been asked by a large client howlong it would take to outfit each of 400 offices in the client’s new headquarters witha desk. The furniture maker realizes that its past deliveries to this customer won’tbe very instructive, because of both the size of the delivery and the vendor’s newlocation. To calculate the delivery lead time, the vendor’s manufacturing director andthe sales manager for the account get together in a conference room and start putting somenumbers on a whiteboard.
It will take them two days to gather all the materials and components they need, before whichno work can start. At peak capacity, the furniture maker’s production facilities canmake up to 600 desks per eight-hour shift, so they should be able to produce the whole orderin a day, as long as there aren’t more than 200 other desks being made that day. Thehard part will be getting the desks to the new building and setting them up in each office—basically, fulfilling an installation requirement that is part of the contract. The companyhas limited trucking capacity, so it will take three days to get every desk to the customersite and another four days — given available personnel — to set up every desk.But desks canstart to be installed after the first day of deliveries is completed. That means there aretwo days of overlap in the previous calculation of three days to get every desk on-site andthe four days to set up every desk.
The delivery lead time for this order would be calculated in this way: 2 days (materials) + 1day (production) + 3 days (transportation) + 4 days (setup) - 2 days (overlap) = 8 days. Theproject plan would look like this:
Since the addition method is forward-looking, the accuracy of time estimates is crucial; sois not forgetting any steps. The time unit can be months, days, hours or even seconds,depending on the situation.
How to Reduce Delivery Lead Time
Longer delivery lead times can increase cost and, in the case of perishable inventory, cancause some or all of the value of a delivery to be lost. Longer delivery times renderbusinesses less responsive and, therefore, less competitive. By contrast, shorter deliverytimes are generally associated with higher customer satisfaction levels. Theoretically atleast, they should also lead to an ability to fulfill more orders and sustain higher salesvolumes over the course of a year.
The advantage of shortening delivery lead times is clear, but how does a company do it? Hereare some strategies that have proven effective.
Break large orders into smaller ones. Larger orders take longer tofulfill. There’s more to make, more to ship and more complexity to manage. Andif the supplier has capacity constraints that a large order can bump up against,such as a limited number of trucks or a small factory, large orders can take extratime. A business customer that places smaller, more frequent orders — or asupplierthat encourages them — can get the benefits of reduced delivery lead times.
Of course, smaller orders are a double-edged sword. If they are too small, a businessmay lose out on economies of scale and volume discounts. A half-full truck uses thesame vehicle and driver hours as a completely full truck. To avoid the potentialside effects of reducing order size, know the tradeoffs and move in a direction thatmakes the most all-around economic sense.
Take advantage of automation. Manual processes take time andintroduce errors, which are often time-consuming to fix. A lot of supply chainprocesses can be handled, in full or in part, by technology. Software can help trackinventory, calculate key performance indicators and pinpoint optimal reorderpoints. Smart hardware — such as systems that use computer vision and camerastomonitor progress and count inventory levels — can add even more capabilities.
Use labor more efficiently. Multitasking can save time. By workingon tasks concurrently, instead of in sequence, delivery lead times can besignificantly reduced. If employees are often sitting around waiting on otherpeople, it could signal the need for process improvements. If the only reason thattasks are being done sequentially is that there aren’t enough employees,bringing in help could provide a boost that more than pays for the added laborcosts.
Optimize and localize supply chains. There are plenty of books thatfocus on ways to optimize supply chains. A good first step, however, is to look atthe longest distances that products and their inputs have to travel. Can four daysbe saved by finding a local supplier for a part or ingredient that is essentially acommodity? A month by cutting out a trans-Pacific cargo container? Going local mayhave a short-term cost, but it can also reduce delivery lead times materially. If abusiness’s goods are durable and its customers are patient, creating a moregeographically concentrated supply chain may not be a priority. To other businesses,it can be the difference between success and failure.
Establish deeper relationships in the supply chain. Goodrelationships with supply chain counterparts can be a huge help in reducing deliverylead times, and especially in avoiding surprising or unexpected spikes in those leadtimes. Open communication can help a buyer understand the capabilities andconstraints of a supplier, and help the supplier understand and prepare for theupcoming needs of a buyer. Whether supplying or buying, a good relationship lets yoube proactive, rather than reactive.
In some cases, long term buyer/supplier relationships will include contractualincentives to keep delivery lead times low. These incentives can include rewards forexcellent performance, such as financial bonuses or priority over other suppliersgoing forward. Contracts can also specify penalties for underperformance.
Optimize Delivery Lead Time With Software
To optimize delivery lead time, look into a software solution. Tracking inventory atdifferent points in the supply chain; calculating key metrics in real time for everyproduct, input and line of business; and integrating supply chain data with financial dataand billing and payment processes are all herculean challenges for a human. But for a goodsoftware-based inventory management system, these tasks are merely part of the dailyroutine.
NetSuite InventoryManagement can scale with a business and calculate key metrics, such as lead times,reorder points and safety stock levels. Good data management will free up time to focus onbigger improvements, while also providing informational inputs to identify where and whatthose improvements could be.
Conclusion
Delivery lead time is an important metric in supply chain management. Whether a business isbuying, selling or moving goods and materials around within the company, it’simportant to know how long a product takes to go through the pipeline from initial order todelivery. Good software can monitor results, establish consistency and even identifyopportunities for improvement.
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Delivery Lead Time FAQs
Is lead time the same as delivery time?
The two terms are often used interchangeably. “Lead time,” however, is a moregeneral term. It refers to the time between the initiation and completion of a businessprocess — pretty much any business process. The more specific “delivery leadtime” refers to the time between an initial order and its delivery.
How is delivery lead time calculated?
Delivery lead time is usually calculated after the fact as the time between when an order wasplaced and when it was received. Delivery lead time can also be estimated by looking at thesteps needed to complete an order and tallying how much time you expect each sequential stepto take.
What is the lead time in purchasing?
The lead time in purchasing, sometimes called purchase order lead time (or POLT), is justanother name for delivery lead time. POLT is often used when formal purchase orders areinvolved or in cases where a company is purchasing raw materials for production.Conceptually, however, there’s no difference between the two terms.
