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.
Lead time, in inventory, 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.
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.
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. (There’s even a forever-free plan!)
With features like barcode/QR code scanning, low stock alerts, customize 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!