What should lead time mean?

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Recently I was looking at different ways of calculating safety stock and one of the calculations I looked at used "average lead time". It occurred to me that lead time is used a lot in supply chain calculations. So, what does it really mean, and should it be recalculated after every delivery?

The simple definition is the number of days between ordering the product to it arriving in the warehouse. But this definition does not cover a lot of issues.

If you are ordering from overseas the supplier will often just be responsible for delivering the goods to the port. From that point, the shipping agent is in control of booking the vessel, the vessel is responsible for the time on the water, the docks and customs department control release of the goods and the local carrier gets the goods to the warehouse. Even if the supplier is reliable there are a lot of factors that can create lead time variability.

The concept of "average lead time" assumes that you always want the goods ASAP. If you are good at forward planning, and want to optimise stock holdings then you might use a forward delivery date. Just because you want delivery in 28 days does not mean that the supplier can’t get them to you in 7 days.

Often, lead time does not take into account the time it takes to get the goods useable after the goods have arrived at the warehouse. Unpacking, sorting, palletisation, quality assurance, and put away can take days depending on the items.

I would have to say that I would favour an "expected lead time" over an "average lead time". It seems to me that setting a lead time that I can reasonably rely on rather than generating a lead time that may contain erratic and misleading data is preferable for reorder, safety stock and materials requirement planning purposes.

How do you determine your lead times, and what do you use them for? Please share your experience and thoughts on lead time.

Steven Hafey

Steven Hafey

Steven Hafey is a Technical Business Analyst for ERP vendor Pronto Software.

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