Lead Time: What Is It and How Do We Minimize It?

In the logistics industry, the optimization of lead time is key, and correct knowledge and management of lead time can increase both profits and productivity. This article provides a comprehensive explanation of what lead time is and how it is calculated.

What is lead time?

Lead time, generally speaking, encompasses the duration of each process from start to finish, including production and transportation.

In the logistics industry, lead time includes the procurement (purchasing), manufacturing, storage, shipping, and delivery of goods. For IT companies, lead time refers to the duration of system development.

In general, lead time refers to the time between the manufacturing of a product and the completion of delivery, while the details of lead time vary depending on the industry.

Shorter lead time increases customer satisfaction

Since lead time in the logistics industry can be considered as the time it takes for a package to reach the customer, reducing lead time leads to higher customer satisfaction.

From the customer's perspective, if two products of the same price exist, a shorter lead time between delivery and receipt of the package will increase customer satisfaction. In addition, in today's age of online shopping, many products offer next-day delivery services, so if you neglect lead-time measures, you may fall behind your competitors in terms of delivery services.

In order to differentiate your company from your competitors and to attract more repeat customers, it is important to shorten lead time.

Lead time as a focus of attention for e-commerce sites

As a result of the COVID-19 pandemic, the number of online shoppers has increased significantly, leading to heightened interest in lead time management at e-commerce sites.

On Amazon, many items are delivered the day after ordering, meaning that the delivery time is a key factor in choosing whether or not to use the site. If you need something immediately, you would likely choose the product with the shortest delivery time, which is why e-commerce sites must adjust to this customer demand.

What is the difference between lead time and delivery time?

Lead time and delivery time are often used interchangeably. Lead time refers to the period of time between order and arrival, while delivery is the date of arrival.

To elaborate, lead time refers to a period of time, such as "the order will be shipped within 3 business days of ordering and will take 3 days to arrive”. Delivery time refers to a specific date and time, such as "scheduled to arrive on December 1", which is thereby different from lead time.
Since lead time and delivery time are similar, they are sometimes used interchangeably. However, they have strictly different meanings, which is why care should be taken when using the terms to avoid confusing consumers.

How to count lead time in the logistics industry

In the logistics sector, lead time is typically calculated from the order placement date to one day if the delivery is scheduled for the following day, and two days if the delivery is set for the day after that.

For example, if an order is placed on Friday for an item that is marked "Ships within 7-10 days (excluding Saturdays, Sundays, and holidays)", the first day of the week, Monday, is counted as the first day of lead time - and only business days are counted.

Also, please note that "2 or 3 days in the middle" may be indicated in the description of the shipping time, meaning that the order will be shipped 2 days after it was placed.

How to calculate lead time

There are two methods for calculating lead time: the "forward method" and the "backward method," each using a different starting date.

The forward method uses the start date as the starting point and estimates the number of days required for the process from order to delivery. The backward method uses the delivery date as the starting point and calculates the number of days needed based on the number of employees and operating days.

This approach offers the benefit of establishing a clear starting point for work to meet the delivery deadline, and enables lead time to be determined based on the current situation. As a result, tasks can be scheduled reasonably, with ample time to spare.

There are six types of lead time

Different industries have different products and services, and lead time is characterized by different processes and concepts.

1. Development lead time

The period of time from planning to completion in product development is called "development lead time”. If a product can be planned and formulated in line with trends and released to the market quickly, it will lead to business opportunities and higher profits.

However, shorter lead time is not always better, and if problems occur during development, extra costs may be incurred. First, be sure to address the necessary processes, such as selection of suppliers, development procedures, and procurement of materials, by dividing them into priority levels.

2. Procurement lead time

The period of time required from "procurement of raw materials to delivery to the production plant" in a manufacturing company is called procurement lead time.

Since a variety of raw materials are required to manufacture products, the procurement lead time must be properly managed. Some products imported from overseas may take a long time to be transported, which is why measures such as requesting suppliers to shorten the lead time are necessary as well.

3. Production lead time

Production (manufacturing) lead time is the period of time from the start of production or manufacturing until a predetermined number of products are produced. If all production is done in-house, the lead time is determined by adjusting employee schedules and equipment resources. If parts of the production are outsourced, then the outsourced lead time must also be taken into account.

4. Shipping lead time

The shipping lead time encompasses the duration from order processing to packaging and final delivery of products that have undergone production and manufacturing processes. An example of delivery lead time that most people are familiar with is the "delivery within 2 to 3 days after order" displayed on an e-commerce website.

Since this does not only refer to the period of product delivery, but also includes the picking process, it is important to consider a mechanism to improve efficiency, such as the introduction of a warehouse management system, in order to shorten the lead time.

5. Purchasing lead time

The period of time from "order to receipt" when purchasing inventory is called purchasing lead time, sometimes referred to as order lead time.

In inventory management, it is very important to know how long it will take to deliver the goods to the customer as a way to prevent excess inventory.

Delivery lead time

Delivery lead time is the sum of the three lead times of procurement, production, and delivery, and refers to the period from the receipt of an order to the delivery to the customer.

What are the disadvantages of long lead times?

Longer lead times can be a disadvantage to both the company and the customer, as it increases the time between purchase and arrival.

In recent years, many e-commerce sites and services offer a 1-2 day turnaround time from order to arrival, meaning that a longer lead time can create a negative impression on the customer. 

The following section will provide details on the disadvantages of longer lead times. In order to shorten lead time, it is important to understand what issues are involved.

Loss of sales opportunities

If the product does not arrive by the desired delivery date, customers are more likely to give up purchasing the product or look for other products, which can lead to lost opportunities. If there are multiple companies offering the same product, customers will often choose the company that offers the fastest delivery date if there is no significant difference in service.

Excess inventory increases costs

In some cases, products with long lead times can lead to large inventories, which can lead to storage costs due to overstocking.

Products that are frequently ordered require a lot of inventory to prevent shortages. Long lead times can lead to a glut of goods waiting to be shipped, increasing inventory management costs.

In addition, overstocking can also result in costs due to inefficiency, since it takes time to locate items when picking.

Decreased customer satisfaction

Long lead times often make customers feel that it took a long time to arrive, which can have a negative impact on customers, making it difficult to secure customers to return in some cases.

With the increase in the number of e-commerce sites and the variety of services available today, customers will purchase products that have an added value, such as a short lead time from order to arrival, which is why the lead time is directly related to customer satisfaction.

Advantages of Reducing Lead Time

This section provides the benefits of shortening lead times. Below is a detailed explanation of each of the main benefits, including cost savings and differentiation from the strong competitors, which is a point of appeal to customers.

Shortening lead time can serve as a point of attraction for companies to acquire new customers and retain repeat customers, among other benefits.

If customers purchase products more frequently, it will greatly contribute to the company's sales.

From the customer's point of view, having the products they want delivered immediately is also a big advantage, and will motivate them to use the service in the future.

Reduced product management costs

Shorter lead times implies that inventory will no longer be stored for long periods of time, and therefore, products will no longer be disposed of due to deterioration. Faster turnover of shipments ensures consistent product quality and reduces excess inventory. Then, the warehouse will not be overwhelmed, and a larger work space can be secured. This has the merit of making picking work easier and creating an environment that is less prone to human error.

Moreover, maintaining a sufficient inventory of popular items in the warehouse would prevent any missed sales opportunities caused by inventory shortages.

Easier adaptation to a changing market

Proper inventory management is important to adapt to changing market conditions, such as rising or falling demand, and shortening lead times can solve problems such as excess inventory and shortages. If products can be delivered within a shorter time frame to meet the rising demand, customers are more likely to place orders for the appealing product, potentially leading to an increase in sales.

Differentiation from competitors will secure repeat customers

By improving delivery services, the company can differentiate itself from competitors and secure more repeat customers. Shorter lead times will enable delivery in the shortest possible time and on the date and time requested by the customer, thereby improving customer satisfaction.

In addition, the increase in repeat customers means more stable sales, which is important from the standpoint of improving overall company profits. However, lead-time reduction must be done in a way that does not lower the quality of operations, since defective delivered goods can lead to complaints and loss of customer trust.

How to reduce logistics lead time

There are various ways to shorten lead time, such as proper staffing, review of work processes, and environmental improvements, which should be done appropriately according to the warehouse management and inventory control situation. Shortening only certain processes may affect other processes, which is why it is important to listen to employees' opinions and take into consideration the overall logistics operations.

Improve technical capabilities through appropriate staffing and training

If lead times are increasing due to labor shortages, this can be resolved by increasing the number of personnel and conducting appropriate staffing. Increased manpower will also lead to increased productivity, so check to see if the number of employees in each process is being maintained at an appropriate level.

If you cannot increase the number of employees, it is also effective to provide training and education to improve each person's ability and reallocate employees according to their skills. By conducting periodic interviews, you can also assign employees according to their abilities and aptitudes, allowing them to demonstrate their capabilities and further improve productivity.

Review the work process

It is crucial to review work processes periodically, especially those that have been in place for a while, as they play a significant role in reducing lead time.

If equipment or systems have been updated, unnecessary processes may have occurred, and lead time may be reduced by reviewing them.

In some operations, work processes may not have been created in the first place. However, this is highly recommended if efficiency is to be improved.

Create an environment that reduces errors

If there are many mistakes made by employees, it is important to clarify why the mistakes are occurring in order to improve the situation. When merchandise is not placed in its designated shelf or when there is an excessive amount of inventory, errors can occur due to inadequate location control. Even with double-checking, this can increase the workload. Therefore, it is crucial to establish an environment that minimizes the likelihood of errors occurring in the first place.

Reviewing suppliers and business partners

To reduce lead time when procuring raw materials, it's important to assess suppliers and potentially consider switching to more efficient ones. Similarly, when working with temporary staffing agencies or transportation companies for deliveries, it's crucial to periodically review their performance to ensure timely delivery. If lead time from order placement to delivery is too long, requesting improvements or exploring alternative suppliers is advisable.

Automate warehouse management operations by introducing machinery

Automation of burdensome warehouse management tasks improves work efficiency and prevents human error by having machines or robots handle the tasks performed by the employees.

Mechanization of warehouse management operations includes the automation of warehouse entry/exit management through the introduction of an inventory management system and picking using a terminal to simplify the work.

Extend the operating hours of logistics operations

One way to reduce lead time is to extend the operating hours of logistics operations, which can be done by increasing the number of personnel or by introducing systems and machinery to operate 24 hours a day.

During peak seasons, normal operating hours may not suffice to keep up with shipment demands, leading to decreased work efficiency. To address this issue, it's recommended implement a system that ensures timely and efficient responses to shipment requests.

Points to keep in mind when shortening lead time

When shortening lead time, if the focus is solely on this, product inspections may be neglected and the quality of the work may deteriorate.

Lead-time reduction should be done within a reasonable range, paying attention to whether the lead-time reduction is cost-effective and whether the quality of the product is being compromised.

Is it an unreasonable work process?

When reducing lead time, it is important to pay attention to whether the work process is unreasonable in order to improve work efficiency.

If the process is forced to shorten the lead time, mistakes that would not normally occur may occur, and there is a risk of information leakage due to picking errors. If work is performed in a hurry, accidents may occur. Therefore, the number of employees and their skills should be taken into consideration when creating the work process.

Is the cost-effectiveness of the project worth it?

In the case of shortening lead time by automating or increasing the number of employees, labor and installation costs are incurred, so be sure to check whether the cost-effectiveness corresponds with sales.

Is quality declining?

If you are preoccupied with reducing lead time, you may end up making the work more tedious. Instead of just shortening the work process, one must aim to reduce lead time while ensuring that the quality of a product is uncompromised. Shortening lead time is crucial for improving customer satisfaction by reducing shipping time. It's important to implement measures that do not compromise quality while achieving faster delivery times.

Are small-lot items missing?

For products stocked in small lots, shortening lead times may result in inventory shortages. While excess inventory can lead to warehouse capacity issues, some companies manage their inventory in small lots. However, shortages can still occur due to temporary closures or production stoppages.

If a supplier's warehouse is damaged by a natural disaster such as a fire or flooding caused by heavy rains, long-term shortages will occur, which is why it is important to maintain a certain level of inventory. However, since it is very difficult to make decisions such as preparing for market changes and possible disasters, it is a challenge for companies to find the best inventory management for their company.

Lead Time is key to surviving the EC Industry

The key to meeting customer needs is to provide a full range of delivery services, and lead time is critical to surviving in the increasingly competitive e-commerce industry.

Some online shoppers search for products based on the assumption that they will be delivered as quickly as possible on the next day, which is why failing to respond to their needs will result in lost opportunities.

In order to shorten lead time and meet customer needs, it is necessary to review various processes in logistics operations, such as delivery methods and warehouse operations.

Conclusion

This article has explained what lead time is, and the advantages and disadvantages of shortening it.

Lead time in the logistics industry refers to the period of time it takes for a package to be delivered to the customer from the time it is ordered, and shortening lead time is important for staying competitive in the market.

To shorten lead time, introducing warehouse management systems and industrial robots is highly effective. Therefore, introducing these systems can have significant effects on lead time and the company's overall competitiveness.