Inventory control is a delicate balancing act: stock enough to keep your customers happy, but not so much that you tie up much-needed cash. Luckily, there are formulas, ratios, and must-know concepts that can help you ace inventory control. One of these concepts: lead time.
In this short article, we’ll define lead time, help you calculate lead time, and show you how lead time plays a role in computing reorder point.
What is lead time?
In inventory, lead time refers to how many days it takes to receive your order once placed.
If your vendor delivers produce the next day, your lead time is one day. If it takes a week to get new lightbulbs, that’s a lead time of 7 days.
Knowing your lead time can help you make educated choices about when and how much product to order. After all, lead time is a key component of calculating the reorder point.
To calculate lead time, add your supply delay (in days) to your ordering delay (in days).
Lead time = supply delay + reordering delay
A reordering delay occurs when you have to wait for a vendor or provider to accept your order. For example, you may place all your orders on Monday, but a certain wholesaler may only process and accept orders on Friday. That’s a four-day reordering delay.
Supply delay refers to how long it takes to receive your order once it’s been accepted. If your stock is delivered the next day, that’s a one-day supply delay.
When combined, reordering delay and supply delay can tell you just how much lead time (in days) you should allow when placing orders.
Reorder Point Formula
The reorder point formula pinpoints when you should reorder a product to achieve optimal inventory control.
Reorder point = [average daily sales * lead time (in days)] + safety stock
To calculate the reorder point, you’ll need to know your average daily sales of a unit, its lead time, and its safety stock. Safety stock refers to that extra inventory you keep on hand, just in case something unexpected happens. To calculate safety stock, (maximum daily usage x maximum lead time in days) – (average daily usage * average lead time in days).
To calculate average daily sales, simply divide total sales for a period of time by the number of days in the period.
Why lead time matters to inventory management
Factoring in lead time is an essential step in effective inventory management. That’s because your team needs to know when to take inventory, place orders, expect delivery, and prepare to accept delivery. This is especially true if you practice tight inventory control, and could potentially run out of key stock if you miscalculate lead time.
Considering lead time is also important to businesses that work with many suppliers. After all, lead times vary from one supplier (and sometimes, one product) to the next. If your business stocks lots of inventory from lots of different vendors, it’s wise to sit down from time to time and calculate updated lead times for every last item on your order sheet.
How to know if your lead time is appropriate
Once you’ve compiled a list of lead times for all the products on your inventory list, look for outliers. Does anything look unusual or unreasonable? You’ll know if a lead time is appropriate when it actually works for you… or, at the very least, when your business is able to work around it.
If you can’t satisfy customer demand, are frequently having to order “emergency stock” at a higher price from a non-wholesale supplier, or are faced with more than one or two unexpected delivery delays in a year, that’s a sign that a supplier’s lead time doesn’t make sense for your company.
How to shorten your lead time
Unfortunately, there aren’t too many ways to shorten lead time. You can lessen your supply delay by changing the day you order to one that’s closer to when a vendor will accept your order. Or you can talk to your supplier about finding a way to speed up your deliveries. (This isn’t usually possible.)
But typically, the best way to shorten a lead time is to shop around. Look for suppliers who offer more favorable, faster lead times, and don’t be afraid to try them out. Need help finding a new supplier? Here’s our guide to choosing the best suppliers for your business.
Inventory Management Software for Inventory Control
Understanding lead time is key to proper inventory control. The right inventory management software can help you forecast better, uncover more data, and make better ordering decisions. While inventory management software can be complex, frustrating, and expensive, Sortly’s intuitive, affordable inventory app offers all the features you need, at a fraction of the price of other inventory management solutions.
With features like barcode/QR code scanning, low stock alerts, customized reports, and a visual, picture-rich inventory dashboard, you’ll always know what you’ve got on hand. Plus, it’s easy to find the numbers you need to calculate key inventory control formulas and ratios.
Ready to get your inventory under control? Start your two-week trial of Sortly today!
Lauren writes about inventory for Sortly. Her favorite thing to organize? Her comically large collection of stuffed animals.