Definition: Lead time is the amount of time elapsed from the moment an inventory replenishment order is placed and the moment the supplier delivers the goods. In other words, it is the amount of time the supplier takes to fulfill an order.
What Does Lead Time Mean?
What is the definition of lead time? This is a metric used for different business processes, but it is most commonly used for supply chain activities. For inventory, the lead-time measures the actual time it takes to replenish the company’s inventory from the moment a purchase order is placed. In some cases, it can go further back and measure this elapsed time from the moment the inventory hits the reorder level (a pre-established level of inventory in which the company must issue a purchase order). This metric is particularly important because companies will try to reduce lead-time as much as possible to increase productivity.
This metric can also be used on the customer side of the transaction. For example, if a customer orders a custom product on January 1 and receives it February 1, the lead-time is one month.
Let’s take a look at an example.
Example
Limitless Vehicles is a company that manufactures luxury automobiles. The company’s Supply Chain Manager, Mr. O’Neill, is worried because the Plant Manager has complained that the production process was halted because of low tire inventory. Mr. O’Neill wants to know how long it takes the company to replenish their inventory of tires after the reorder level has been reached, so he can make sure the new tires come in before they run out of stock.
Thus, he must first figure out how long it takes the company to issue a replenishment order after the reorder level is reached, then after that, he must count the days from the time the order is placed to the time it is actually delivered. Then he needs to make sure the order is placed at the right time giving the tire supplier the amount of time necessary to fulfill the order and deliver the tires.
This concept can be applied to any process to measure the amount of time it takes to fulfill a particular demand.
Summary Definition
Define Lead-Time: Lead time means the amount of time between when a product is ordered and when it is produced or received.
