Understanding Lead Time and the Effect of Lead Time on Order Decisions – Lead time is the amount of time required from the time a customer makes an order until the product is out for delivery, including the time needed to produce material for the product or the time required to receive the material.
On the customer side, Lead Time can be interpreted as the time needed to process an order to receive delivery of the ordered product. For example, we place an order today and receive a shipment within 4 days later, meaning the waiting time or Lead Time for the order is 4 days.
The term “lead time” is commonly used in many fields of Manufacturing and Services such as Supply Chain Management (SCM), Project Management, Supplier Management, Material Requirement Planning & Corporate Need Planning (MRP & ERP), Software Development and even in Human Resource Management.
Basically, almost every business has a Lead time that must be considered. Interpretation of the term “Lead Time” may be different in each field depending on the nature of the operation. For example in the Supply Chain Management field, Lead Time is the duration from the time the order is received until the item is sent to the customer.
Whereas in New Product Development, Lead Time is the time required for a product to reach its market. In addition, Lead Time in Human Resource Management is the time needed for the recruitment of human resources to the organization or company.
The translation of the term Lead Time varies according to the field of operation as well, some call it “Grace Time” and some call it “Waiting Time” and some translate it into “Ordering Time for Materials”.
Keep in mind that high Lead Time will result in high inventory and will also affect customer / buyer satisfaction which will ultimately look for other alternative products.
Definition of Lead Time according to Experts
To get a bigger picture about the Lead Time, here are some definitions of Lead Time according to the Experts.
- Understanding Lead Time according to Zulfikarijah (2005: 96), Lead Time is the time required between ordering the goods till they are received by the company. So that lead time is related to the reorder point and when receiving goods.
- Understanding Lead Time according to Assauri (2008: 264), Lead Time is the length of time between starting the ordering of materials until the arrival of the ordered materials and being received at the inventory warehouse.
- Understanding Lead Time according to Slamet (2015: 71), Lead Time is the period of time needed from the time of order until the arrival of raw materials that have been ordered.
Lead Element or Variable Lead Time
Lead Time in a manufacturing company is basically formed from several elements or variables, including:
Lead Time = Preprocessing Time + Processing time + Waiting time + Transportation time + Inspection time + Storage time.
- Pre-processing Time: The time needed to receive a Request, understand the request, and make a Purchase order.
- Processing Time: The time needed to produce or buy goods.
- Waiting Time: The amount of time needed in the queue waiting for production.
- Transportation Time: Time of goods in transit to reach the customer.
- Inspection time: The time needed to inspect the product if there is a discrepancy.
- Storage time: Time for goods to wait in a warehouse or factory.
Effect of Lead Time on Order Decisions
Lead Time is very influential in the decision of ordering materials in each production process. Ordering materials intended for production will be problematic if it does not take Lead Time into account.
Orders that do not match Lead Time will result in high inventories that harm the company or a shortage of materials that can be used resulting in the cessation of the production process. Therefore, we need to calculate well that the order amount is in accordance with the Lead Time.
How to calculate the ROP or Reorder Point
To determine the exact amount of ordering material, we need to do the ROP calculation or Reorder Point as the equation or formula below:
ROP = L x R
Reorder Point = Lead Time x Average Daily Usage Qty
ROP = Reorder Point
L = Lead Time
R = Average Daily Usage Qty (Average number of usage per day)
LCD that is needed in the smartphone production requires Lead Time for 30 days, production requires around 1000 units every day. What is the amount needed to reach the Reorder Point?
L = 30 days
R = 1000 units of
ROP = L x R
ROP = 30 days x 1,000 units
ROP = 30,000 units
So the Reorder Point or ROP of the case is 30,000 units.