Your supplier says they can deliver in two weeks. But when you actually track shipments, it's closer to three. That gap between expectation and reality is why understanding lead time matters for every inventory decision you make.
Lead Time Definition
Lead time is the total duration between placing an order and having that inventory available to sell. It's not just shipping time—it includes every step from order submission to product on the shelf ready for customers.
For inventory planning, lead time answers a critical question: how far in advance do I need to order to avoid running out?
Components of Lead Time
Lead time isn't one thing—it's the sum of several stages:
Order Processing Time
The time your supplier needs to acknowledge, process, and begin fulfilling your order. This might be same-day for a responsive supplier or a week or more for one with limited capacity.
Manufacturing/Production Time
If your supplier manufactures to order (rather than shipping from stock), add production time. This can range from days to months depending on the product and supplier.
Shipping/Transit Time
The actual transportation time from supplier to your warehouse. Domestic shipments might take days; international ocean freight can take weeks.
Customs and Clearance
For international orders, factor in customs processing, inspections, and potential delays. This is often the most variable component.
Receiving and Put-Away
Once the shipment arrives, your team needs to receive it, inspect for damage or shortages, and put it away in inventory locations before it's available to sell.
How to Calculate Lead Time
Total Lead Time = Order Processing + Production + Transit + Customs + Receiving
Example Calculation
You order protein bars from a domestic co-packer:
- Order processing: 2 days
- Production: 5 days
- Shipping: 3 days
- Receiving: 1 day
Total lead time: 11 days
This means you need to order 11 days before you need the product in your warehouse and ready to sell.
Why Lead Time Matters
It Determines Your Reorder Point
Your reorder point formula is: (Daily Demand × Lead Time) + Safety Stock. A longer lead time means a higher reorder point and more inventory tied up in the pipeline.
It Affects Cash Flow
Longer lead times mean ordering further in advance, which means paying for inventory earlier. For brands with tight cash flow, this matters significantly.
It Limits Flexibility
With a 2-week lead time, you can respond to demand changes relatively quickly. With a 12-week lead time (common for overseas manufacturing), you're making bets months in advance.
It Impacts Safety Stock
Less reliable lead times require more safety stock. If your supplier is sometimes 14 days and sometimes 28 days, you need to buffer for the longer scenario.
Average vs. Maximum Lead Time
Your planning should account for variability:
Average Lead Time: What you typically experience. Use this for baseline planning.
Maximum Lead Time: The worst case you've experienced (excluding true outliers). Use this for safety stock calculations.
If your average lead time is 14 days but shipments sometimes take 21 days, your safety stock should cover that potential 7-day delay.
Tracking Lead Time Performance
Don't rely on what suppliers promise—track what actually happens.
For each purchase order, record:
- Date order was placed
- Date goods were received and available
- Calculated lead time (the difference)
Over time, you'll build data showing your true average lead time and its variability. This data is far more valuable than supplier promises for planning purposes.
Ways to Reduce Lead Time
Domestic vs. International Sourcing
Moving from overseas to domestic suppliers can cut lead times dramatically—from months to weeks. The trade-off is often higher unit costs.
Supplier Relationships
Consistent, predictable orders and good relationships can earn you priority treatment, faster processing, and better communication when delays occur.
Inventory at Supplier
Some brands keep buffer stock at their supplier's facility, allowing faster shipment when orders are placed.
Improved Forecasting
Better forecasts let you place orders earlier and in steadier quantities, giving suppliers more time to fulfill without expediting.
Process Improvements
Streamline your own receiving process. If goods sit on the dock for days before being put away, that's lead time you control.
Lead Time for Multi-Supplier Products
When a finished product requires components from multiple suppliers, your effective lead time is driven by the longest component lead time—plus assembly/production time.
For example, if Component A has a 4-week lead time and Component B has an 8-week lead time, your finished product effectively has at least an 8-week lead time (plus production).
Key Takeaways
- Lead time is the total time from placing an order to having inventory available to sell
- It includes order processing, production, shipping, customs, and receiving
- Track actual lead times, not supplier promises
- Longer and more variable lead times require more safety stock
- Your reorder point is directly tied to your lead time—understand one to calculate the other
- Look for ways to reduce lead time to improve inventory flexibility and cash flow
Frequently Asked Questions
Q: What is lead time in inventory management?
Lead time is the total duration between placing an order with your supplier and having that inventory available to sell. It includes order processing, production, shipping, customs (if applicable), and receiving time.
Q: How do you calculate lead time?
Add up all the stages: order processing + production + transit + customs + receiving. Track this for actual orders to build reliable data rather than relying on supplier estimates.
Q: Why does lead time matter for inventory planning?
Lead time directly affects your reorder point. Longer lead times mean ordering earlier and carrying more inventory. Variable lead times require more safety stock as a buffer.
Q: What's the difference between lead time and delivery time?
Delivery time usually refers just to transit/shipping time. Lead time is broader—it includes everything from order placement to inventory being available to sell.
Q: How can I reduce lead time?
Consider domestic suppliers, build stronger supplier relationships, improve your own receiving process, and explore keeping buffer stock at supplier facilities.