Lead time is the period between a customer's order and delivery of the final product. A small
order of a pre-existing item may only have a few hours lead time, but a larger order of custom-
made parts may have a lead time of weeks, months or even longer. It all depends on a number of
factors, from the time it takes to create the machinery to the speed of the delivery system. Lead
time may change according to seasons or holidays or overall demand for the product.
Manufacturers are always looking for ways to improve the lead time on their products. Lead time
can mean the difference between making the sale and watching a competitor sign the contract. If
a company can deliver the product weeks ahead of the competition, it stands a better chance of
receiving future orders. Because of this, management and labor teams routinely hold meetings to
discuss lead time improvements.
For a real world example of lead time in action, let's order a pizza. When you as the hungry
customer decide on a preferred local pizza restaurant, you may have already considered such
factors as speed and consistency. The selected restaurant must first receive your custom order,
based on their pre-stocked ingredients. Once you've placed your order, the restaurant may tell
you to expect the finished pizza in 45 minutes to an hour. This would be considered lead time.
The restaurant bases this time on several factors: the time it takes to prepare the pizza, the
cooking time, the availability of delivery drivers and the distance to your home.
As the potential customer, you could still change your mind and place an order with a different
restaurant known for its speedy delivery times. The same style of pizza may arrive in 30 minutes.
It's an identical product, but the lead time is different. This other restaurant may use prepackaged
pizzas or hire more delivery drivers. There may be some limitations on delivery areas, however,
or the pizza may not be cooked well. Sometimes a shorter lead time is no guarantee of overall
quality. Lead times may also change according to the day of the week -- demand may be higher
on weekend nights, for example, creating a longer lead time.
This is the challenge many companies face when attempting to improve lead time on a product
line. Some processes simply take more time to create a high quality product. A custom order may
require months of preparation before the factory is capable of mass production. It can be
challenging to offer a competitive lead time to the customer while still maintaining quality
control over production. Companies must remain realistic with their lead time estimates
Reorder PointWhen to Order or Produce
1. The reorder point is the point in time when a new order should be placed (or
• To avoid stock-out costs and to minimize carrying costs, an order
should be placed so that it arrives just as the last item in inventory is
2. Lead time is the time required to receive the economic order quantity once an
order is placed or a setup is initiated.
3. The reorder point is a function of the EOQ, the lead time, and the rate at which
inventory is depleted.
Reorder point = Rate of usage × Lead time
Demand Uncertainty and Reordering
1. If the demand for the part or product is not known with certainty, managers need
to consider carrying safety stock to avoid stock-out problems.
2. Safety stock is extra inventory carried to serve as insurance against fluctuations
in demand. Safety stock can be computed as follows:
Safety stock = Lead time × (Maximum rate of usage – Average rate of usage)
3. With the presence of safety stock, the reorder point is computed as follows:
Reorder point = (Average rate of usage × Lead time) + Safety stock