Order lead time is a crucial metric for retailers to consider. It affects everything from inventory planning to sales and profits. In this blog, we will explore what order lead time is, why it is important, and how it works. We will also examine the factors that can affect order lead time and provide tips for improving it.
What is Order Lead Time?
Order lead time is the amount of time it takes for the supplier to have your order ready for delivery from the day you place your order. For example, if you place an order on January 1st and it will be ready for dispatch on February 1st, then the order lead time is one month.
Importance of Order Lead Time
Order lead time and its accuracy can affect both your sales and profits. If your products don’t arrive on time, it could result in missed sales budgets or even loss of market share to competitors. On the other hand, opting for a supplier with shorter lead times could impact profitability. This is why it’s critical to use appropriate metrics to ensure that customer orders are fulfilled promptly and efficiently.
How Does Order Lead Time Work?
Calculating Order Lead Time
Depending on the order lead time, you will have to plan your buying, inventory planning, and buying budget. For instance, if you need to place orders six months in advance, this might be difficult to predict and rectify if any mistakes happen.
If you end up with lower sales, you might choose to skip the order for next month. If you end up with lower inventory, you can make a new order and receive it within three weeks. The amount of sales you might have lost during this time will be relatively low compared to a six-month period.
How To Calculate Order Lead Time
- Understand the components of lead time: The main factors that make up lead time are preprocessing, processing, waiting, storage, transportation, and inspection.
These factors are often compiled into three main stages of an order: before (pre-processing), during (processing), and after (shipping).
- Gather necessary data: To calculate order lead time, you need information on the time taken for each stage of the order process. This includes the time taken for preprocessing, processing, and shipping.
Use the lead time formula: Lead Time (LT) = Order Delivery Date – Order Request Date
The most common formula for calculating lead time is subtracting the order request date from the order delivery date.
- Consider supply delay and reordering delay: In inventory management, supply delay refers to the time taken by the supplier to fulfill a customer order after it’s placed, while reordering delay is the time between the fulfilled order and the placement of the next order. To calculate lead time in this instance, add the supply delay to the reordering delay: Lead Time (LT) = Supply Delay (SD) + Reordering Delay (RD)
5. Calculate manufacturing lead time: Manufacturing lead time consists of material lead time (time taken to deliver materials to the manufacturer), production lead time (time taken from receiving materials to producing a finished product), and customer lead time (time taken to move finished products from the manufacturer to the customer).
6. Determine actual order lead time (A-OLT): This is the time taken from receiving the order to fulfilling it.
7. Compare requested order lead time (R-OLT) and confirmed order lead time (C-OLT): R-OLT is the time between the order and when the customer wants delivery, while C-OLT is the date on which the delivery has been confirmed. Comparing these two metrics can help identify any discrepancies and improve lead time accuracy.
Impact on Sales and Profit
Poorly-managed lead time can result in stocks running out, leaving customers unable to get their orders fulfilled. This can cause businesses to lose custom to competitors, damaging their reputation and profitability.
Lead time can have a significant impact on the customer experience. Consumers have a lot of choice at their disposal now, and it’s easy for them to take their custom somewhere else if they have a bad experience with a retailer. If their orders are delayed or they can’t find what they want, they’re likely to seek alternative outlets.
Factors Affecting Order Lead Time
Lead time is the amount of time that goes by from the start to the finish of any given process. For eCommerce businesses, it affects every stage of the supply chain. Moreover, it determines the quality of your services. If it gets out of control, it can cause huge issues in inventory management and the order fulfillment process. Hence, it is essential to optimize lead time.
Seasonality can affect order lead time. During peak periods, such as Christmas, order lead times may increase due to high demand. Retailers should plan ahead for these periods and communicate with their suppliers to ensure they can meet demand.
The type of supplier can also impact order lead time. Larger suppliers may have longer lead times due to their size and complex supply chains. In contrast, smaller suppliers may be able to provide shorter lead times due to their more streamlined operations.
The quality of the supplier can also affect order lead time. Reliable suppliers with good communication and delivery systems are more likely to deliver products on time and within the agreed-upon lead time.
Improving Order Lead Time
There are several ways to improve order lead time:
Increasing Supply Chain Efficiency
Efficient supply chain management can help reduce order lead times. Retailers can work with suppliers to streamline processes, reduce waste, and optimize delivery routes to improve efficiency.
Improving Supplier Relationships
Building strong relationships with suppliers can also help improve order lead time. Regular communication and collaboration can help retailers and suppliers work together to identify potential issues and find solutions.
Communicating Demand Forecasting Results
Retailers should communicate their demand forecasting results with suppliers to help them plan and prepare for future orders. This can help ensure that suppliers have the necessary resources and materials to fulfill orders promptly.
Automating Order Processing Workflows
Implementing automation in order processing workflows can help reduce lead times and minimize human error. Automated systems can track orders, manage inventory, and streamline communication between retailers and suppliers, leading to more efficient operations and shorter lead times.
Order lead time is a critical metric for retailers, as it impacts sales, profits, and customer satisfaction. Understanding what affects order lead time and implementing strategies to improve it, retailers can ensure they have the right products in stock at the right time to meet customer demand.