## Executive Summary

• We cover how to calculate overall supply lead time, customer lead time, supply lead time in inventory.
• This describes how to calculate lead times and overall lead time calculation.

## Introduction: What Makes Up the Lead Time?

Lead times are one of the major timing elements within the overall subject of supply chain planning. This article will cover lead time in several dimensions and focus on lead time calculation.

We will start off with the lead time definition and discuss the lead time’s function in the supply chain. You will learn all of the sub-lead times that constitute the overall lead time.

The lead time in supply chain or lead-time supply chain relates to lead times specific to supply chain planning and are what when combined to make up the time from when the order is placed until the time the order arrives.

• These are all terms that describe lead times specific to supply chain management.
• Lead times are of course also a general term that can apply to non-supply chain topics. For example, a product plan results in calculating a series of lead times for completing various stages of a project, as well as the overall product duration.

Lead times are normally not shown graphically in supply planning systems, however, if they were — they would look something like a project plan. That is lead times are a sequence of dependent durations with relationships. Manufacturing can’t commence upon material until the material arrives, and the material can’t arrive, until the time has passed from the order, etc..

## Auto Lead Time Calculation of Interdependent Lead Times in Supply Planning Systems

In a supply planning system, all of these dependencies are calculated every time and sales order is created.

• The system knows that if a sales order is desired for say August 20th.
• The procurement order for input item ABC must be made on May 12
• The overall production order must commence on July 5th, etc..

The total lead time is the time required to complete a supply chain process required to provide the product to a customer. The overall lead time is made up of the following sub-lead times from the supply side:

This includes:

These are more hypothetical lead times with it comes to supply planning and are measurements of lead time that occur before the order is placed.

## How is The Supply Lead Time Incorporated into Inventory Management and Safety Stock

• Supply lead time inventory is made up of the portion of the inventory that is held without any variability.
• Safety stock is made up of inventory that accounts for variability or uncertainty on both the demand and supply side. And with a dynamic safety stock formula, the service level is another category of the safety stock.
• Safety stock for the lead time in inventory would then be where the variability (which is always higher as only the variability above the baseline is what is calculated in safety stock) of the lead time is maintained.

There is a lead time analysis that can be performed to determine the position in the lead time which is accounted for in inventory. This lead time analysis can divide the product database by lead-time length or duration. But this required performing a lead time calculation.

## How to Calculate Lead Time, Lead Time Calculation and How to Build a Lead Time Calculator

The various lead times connect in the following way:

## For Manufactured Products

For Procured Products

Replenishment Lead Time = Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time

Often what is desired to be calculated is a total lead time. This means having a lead time calculator that combines multiple component lead times that are shown above.

## How Effective is Putting Effort into Reducing the Lead Times?

There is often discussion of expediting the various lead times. Process improvement or Six Sigma or Lean consultants often propose simply reducing lead times.

The proposal is often stated as..

“If we can reduce our lead times, by ABC% we could reduce our inventory by ZYX%.”

The consultant will often present the information as if there are many companies that have had success in reducing lead times. Lean consultants tend to have a philosophical problem with any constraints that exist in the supply chain. Their training is designed around altering the constraints rather than adjusting to these realities. These consultants will propose working with suppliers or using various forms of expediting.

The problem with this is that it tends to provide a false impression of the actual constraints. And secondly, it tends to be proposed by people with a background in areas other than the domain of supplier management and shipping. That is the lead times that exist are typically there for a reason.

Lead times reduction projects ten to take a lot of time, and most of them don’t work out. In the interim, the supply planning systems need to reflect the lead times as they are.

## Applying the Wal-Mart Strategy with Suppliers?

Wal Mart is often pointed to as a company that is able to get suppliers to make major adjustments for them. However, there is an obvious and serious problem in projecting what Wal-Mart has done and can do with suppliers to other companies.

• Unless the company being discussed is a substantial percentage of the supplier’s business, it is unlikely the supplier is interested in adjusting its operations to suit one supplier. The lead time is configured around the cost that is negotiated. As soon as a shorter lead time is requested, this is a change to the terms of that arrangement — and the buyer needs to expect to pay more for the same items. Lean consultants tend to make it sound as if suppliers will simply change the terms of the transaction without any request for extra compensation. Suppliers that won’t conform to the expectations of the Lean consultant are often categories as “difficult.”
• When the proposal is made by a Lean consultant, it typically is just one of the areas that he is trying to pitch to justify his cost billing the account.
• Suppliers are ordinarily already trying to get products to their customers as quickly as is financially feasible. Suppliers know that customers are including lead times or “responsiveness” into their evaluation of who they will select as a supplier.
• The Lean consultant may propose switching to different suppliers with shorter lead times, however, this is normally only done at a higher cost.

In many cases, the only lead time that is reasonably capable of being expedited is the shipping lead time. The shipping lead time can only be accelerated at considerable expense (unless the product in question is of high value and low weight). A second area that is proposed is that the current manufacturing lead times can be reduced.

Again, in many cases it is possible, but only at considerable expense. This often means installing more machinery or adding more machine operators. Overall manufacturing capacity is frequently reduced (and therefore lead times lengthened) through the process of product proliferation. Therefore manufacturing capacity could be increased and lead times reduced by cutting down on changeovers — but this is typically not acceptable to marketing.

## Realizing The Reality of Lead Times

It is rare for companies to actually substantially reduce their lead times. That is, lead times tend to be far more fixed than is often promoted by various process improvement consultants. Therefore, rather than being distracted by concepts around reducing lead times, the most important function is to simply reflect the lead times in the supply planning system. Any inaccuracy of the lead times impacts the accuracy of the supply plan the same way that a forecast error would.

## The Typical Accuracy of Lead Times Residing in Supply Planning Systems

Lead times normally have a level of inaccuracy, and companies typically put very little effort into updating their lead times. That is once a lead time is entered into the system, it is likely to stay there for many years. Companies will often talk about their lead time inaccuracies but normally will not make it a priority to modify or update the lead times. If a company reduces lead time inaccuracy by say 10%, this has the same impact on the accuracy of the supply plan as a 10% reduction in forecast accuracy.

Finally, with the use of so many suppliers in so many industries that are driven by cost considerations, it means that the lead times have actually lengthened in the developed countries. Many input products for at least some industries come from China. Companies could have sourced those products from the US, but they preferred the higher margins of Chinese manufacturing.

## A False Belief of Frequently Updating the Planning Process for Responsive Supply Chain

In many companies, a mantra has developed that it was important to be able to reflect the most recent updates to the planning process. What this results in are frequently last minute updates to the forecast and a very short or non-existent frozen period. This is promoted as forward thinking when in fact it is quite regressive.

## The History of Supply Chain Planning

Planning has always existed in one form or another. However, it developed in conjunction with the rise of computers. There is no doubt in my mind that grain warehouse managers in ancient cultures performed some planning for managing the creation and inventory management of anything from grain stores to stones at a quarry. There is no doubt that planning took on enhanced capability with computers providing the ability to manage large amounts of data necessary to perform detailed planning.

However, while many companies purchased supply chain planning software, far fewer internalized the concepts and discipline of planning. For this reason, the vast majority of supply chains are reactively managed, and many people in high levels of companies such as Vice Presidents and Directors of Supply Chain do not appreciate or have even studied supply chain planning at any level of detail. For many of them, the planning systems they are merely things to be manipulated to meet their short-term goals.

## Responsive Supply Chain Concepts

Many think that the more they interfere with the system and the more responsive they make the system; the better the results will be. Thus, few organizations make much progress with their supply chains from year to year, because they lack the knowledge and discipline among their leadership ranks of how to effectively manage the systems they have purchased to achieve the organizations’ supply chain objectives.

## The Issue of Lead Times and Responsive Supply Chain

The problem with this idea is that it can be easily contradicted by looking at lead times. That is changes to forecast cannot realistically be expected to be managed efficiently if they come in within total manufacturing or procurement lead times. However, the response one gets is that materials can be expedited.

What would seem desirable is for companies to build in flexible lead time capabilities into their products so that different lead times could have different costs associated so that the model could pick the best most appropriate lead time.

The problem with this is most companies don’t know the actual costs of expediting products, and secondly, they have a big enough problem managing the master data of the lead times that they already maintain.

## Conclusion

However, to calculate lead time and develop an accurate lead time calculator and perform lead time calculation means knowing the independent lead time components. These include things like the manufacturing lead time, procurement lead time, supply lead time, etc..

There are a number of topics around lead time accuracy and the opportunity to reduce lead times. However, the role in supply planning with lead times is to try to reflect the actual lead times within the supply planning system.

The concept of planning systems with regards to lead times is simple. The lead times entered are to be the company’s best guess as to the time required to perform different tasks. Planning systems are deterministic in that they produce a plan based on these lead times, and they need a sufficient lead time to do their job. If you interfere with their operation by forcing a broken and undisciplined forecast process onto the supply and production planning system, negative consequences will occur.

## Tuning ERP and External Planning Systems with Brightwork Explorer

MRP and supply planning systems require tuning in order to get the most out of them. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

## Replenishment Triggers: Setting Systems for Make to Stock, Make to Order & Assemble to Order

### Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

### The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

### Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

• What are the major manufacturing environments and what determines which manufacturing environment a company follows?
• How do the different manufacturing environments impact how inventory is carried?
• How are the various production environments configured in software?
• What is mass customization, and how accurate is useful is this concept in real life?
• What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

### Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

## Executive Summary

• Lead time has a definition and has different categories.

## Introduction: Lead Time as a Foundational Concept

Lead times are always in the background but often overlooked in supply chain management. Even central concepts such as Lean or JIT are based upon (in part) a misunderstanding of lead times versus the replenishment trigger.

You will learn the common lead time categories and our analysis of common (and commonly confusing) lead time topics.

Lead times are the time between locations to within, or from a supply network.

The term lead time often includes processing at the beginning or end of the main consuming component. For instance, a standard lead time definition will consist of the total supplier or customer lead times include the transportation lead time.

The following are common lead times that we will define.

• Stock Transfer Lead Time Definition
• Goods Issue Lead Time Definition
• Goods Receipt Lead Time Definition
• Quality Inspection Lead Time Definition

The time from when the production order is created to when the finished good is available.

The time from when the procurement order is placed to when it is received.

## Stock Transfer Lead Time Definition

The time from when an item is issued from one internal facility to when it is received into another internal facility. Identical to the procurement lead-time, except it covers internal shipments rather than receiving shipments from external sources.

The time from when an item is shipped to when it is received.

## Goods Issue Lead Time Definition

The time from when an item is released to when it is available (normally for production or for shipment)

## Goods Receipt Lead Time Definition

The time from when the item is received to when it becomes available as inventory.

## Quality Inspection Lead Time Definition

The time from when an item is released to when it passes quality inspection.

A subcomponent of the overall manufacturing lead-time.

Not a standardized term as there is no “total lead time” within a system. Rather it is a conceptual term.

Normally it is the entire time from when an order is placed until the item is delivered.

Notice that some these lead times are not referred to as “lead times.” For instance, one would ordinarily use the term “setup time” rather than “setup lead time.” However, the setup time is a lead-time as it is a time required to complete a task.

## The Importance of Lead Time Accuracy

One of the major related issues with the lot size determination is data quality and accuracy of lead times. For a supply planning system to calculate accurate dates, the system must have lead times that reflect the reality of operations. The problem is that lead times often differ quite substantially from reality.

• It should be noted that there is often a lead time variance from suppliers.
• There can also often lead time variances in manufacturing as well as outbound transportation.

Interestingly this is not an issue that is discussed within companies. But it should be because it is a much wider problem than generally understood. And while there is a universal interest in forecast accuracy, lead time accuracy is often overlooked.

Lead time meaning is the time required to complete a supply chain process required to provide product to a customer ultimately.

The Customer lead time and order lead time are considered to be synonyms.

Therefore when the question “what is lead time” the answer depends on what lead time is being discussed.

Many companies make very high profits by importing products made in low wage countries. These products mostly come by ship and have long lead times. While many Lean consultants have preached about lowering lead times, this outsourced manufacturing to these low wage countries has caused lead times to lengthen quite significantly. However, the profits are so high on these items from a financial perspective, it makes sense to accept the long lead times.

A product location database can be segmented by the length of the lead time. What is considered a long versus short lead time can change depending on the company.

For many US companies, the division between long lead time items and short lead time items is whether the product is sourced from overseas (often China) or domestically sourced. Of the products that are locally sourced cost more, but come along with short lead times.

Long lead time items must be planned considerably differently than short lead-time items, and there is less margin for error. Long lead time items must carry more safety stock than short lead-time items to make up for this.

## How to Reduce Lead Time and The Feasibility of Lead Time Reduction

Often it is proposed that one can reduce lead times and therefore reduce the impact of lead times on supply chain planning. But really, what is the feasibility of lead time reduction? It turns out that there are normally few options to reduce lead times. The lead time that has the highest feasibility of lead time reduction is normally shipping lead time.

However, shipping lead time is also normally expensive to reduce. And the supposed case studies that often are used to show the feasibility of lead time reduction tend to have little-published detail about them, and therefore are difficult to verify independently.

## How to Calculate Lead Times

To properly understand lead times, it is beneficial to view the subcomponents of lead times to determine what makes up the overall lead time. We covered this topic in the article How to Best Calculate Lead Times.

## The Definition of Effective Lead Time

Up until this point, we have covered lead times as entered in systems, or static lead times. However, there is another type of lead time that is important to understand that changes depending upon the specific circumstance of demand and applied to the supply network. This is the concept of effective lead time.

Effective lead time is only modeled if the category of supply planning software call multi-echelon planning is used.

• Different demand levels, lead to different circumstances and different needs to move to a higher echelon in the supply network.
• The most important thing to consider is that while lead times between locations do not change (in the short term) effective lead times do change.

For software to be considered multi-echelon, it must have the ability to reflect the changes in effective lead time in its planning. This, combined with inventory optimization, which is a different set of mathematics. It is what allows the software to position inventory to the right location properly. To select the right quantity based upon the demand, the current stocking position, and the service level.

It can also be described graphically which can allow the reader to more intuitively understand what effective lead time is.

## Other Users of the Term Effective Lead Time

Another use of the term is when a company needs to determine if it has the raw materials/components/packaging material to make an order quantity. If a company can produce the sales order quantity from safety stock of all input materials, then the effective lead time is the production lead time.

If the order quantity exceeds this, the effective lead time must include the procurement lead time.

This is covered in more detail in this article.

## How Can One Use the Concept of Effective Lead Time?

Interestingly, the term “effective lead time“ is unique to a special class of supply planning software, but is still useful to understand as a concept even if that category of software is not used.

Effective lead-time is the total lead-time required to deliver the product to its final destination. It is variable and dependent upon the stocking positions of higher echelons in the supply network. This is a conditional concept of lead time. A conditional concept of time for a lead time is quite foreign to the normal usage of the term lead time, which is static and hard-coded into a system.

When higher-level locations must be called upon to satisfy a demand, this lengthens the lead time.

In the excellent paper by Cohen, Agrawal, and Agrawal on dynamic asset deployment, this is described as follows.

“Similarly, investing in additional safety stock at a central depot reduces the effective lead-time for replenishment at the “child” locations connected to it. This lead-time reduction will, in turn, affect the stocking requirements at the child locations. Alternatively, such decisions are often constrained by the budgets allocated to the service organization. Consequently, if a particular asset is assigned to a specific location, it affects what can be assigned to other locations. Thus, the service levels that can be offered to customers at various locations are affected by these decisions, and are, therefore, interrelated; a high level of service to one customer may imply a lower level of service to another.” – Achieving Breakthrough Service Delivery Through Dynamic Asset Deployment Strategies, Cohen, Agrawal and Agrawal 2004

## Conclusion

The lead time meaning is the time required to complete a supply chain process.

Lead times are one of the most important foundational components of supply chain planning. Many of the misunderstandings when it comes to business process or supply chain planning systems have their source in a faulty understanding of lead times. A good example of this is the notion that companies can simply switch to a make to order manufacturing environment.

• Some things that many people do not think of as lead times are in fact lead times.
• Lead times in most systems are static. But in some systems, they can be variable and dependent upon changing circumstances.

Lead times are any passing of time that can contribute to the time required to make something in the supply chain occur.

One of the most important lead time distinctions in companies is short lead-time items versus long lead time items. Most companies treat the planning of short lead-time items quite differently from long lead time items.

What is often not included in cost calculations for moving to lower-cost items with long lead time items is the increased inventory costs which as well as planning and update costs which are incurred by accepting longer lead times.

Lead times which change depending upon the circumstance of demand versus the inventory or planned inventory in the supply network are called effective lead times. The only supply planning method that calculates effective lead times is classified as inventory optimization and multiechelon software.

## Replenishment Triggers: Setting Systems for Make to Stock, Make to Order & Assemble to Order

### Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

### The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

### Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

• What are the major manufacturing environments and what determines which manufacturing environment a company follows?
• How do the different manufacturing environments impact how inventory is carried?
• How are the various production environments configured in software?
• What is mass customization, and how accurate is useful is this concept in real life?
• What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

### Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

## Executive Summary

• The percent forecast error is commonly calculated in a problematic way.
• We cover the proper forecast error measurement in the time dimension.

## Introduction to Forecast Error

Not much thought is given to this topic, yet all forecast errors reported by companies are questionable because of an important consideration. That is the interval over which the forecast error is calculated. You will learn about how forecast error is managed.

## How the Percent Error is Calculated and the Mismatch with Lead Times

If we review how the forecast error is commonly calculated by supply chain companies, we find the following.

• Typically forecast error is calculated on a month per month basis. That is the forecast is divided by the actual demand for a product location (or for whatever level of aggregation is being measured). In a dynamic safety stock calculation, the error is calculated over the lead-time. If the lead-time for the product is two months in length, and the month to month MAPE is 50 percent error, if 50 percent error is used, while the two-month MAPE is 25 percent error, the calculated safety stock will be too high.
• If on the other hand the lead-time is two weeks, and the 50% MAPE is used, the safety stock will be too small.

## The Proper Forecast Error Measurement in the Time Dimension

The only proper forecast error measurement is over the lead time. This can be seen by taking an example. If you have a one-week lead-time, then you can reorder every week. Therefore you can reorder the following week. On the other hand, if the lead-time is three months, you cannot adjust the forecast during the three month period after the order is placed.

Therefore under the standard monthly forecasting error measurement interval, the forecast error will be overestimated for the product with the weekly lead time and underestimated for the product with the three month lead time.

## The Problems with Using a Month as the Forecast Measurement Interval

A month is used in many cases to measure forecast error, and I do it myself on projects because if one has an overall database of products, it is too much work to adjust the forecast error per lead time per product as each product has a different lead-time.

Now I have never once seen this topic raised on projects. But it is undeniably true. Therefore, due to the complexity of measuring forecast error in this way, the standard and inaccurate interval of a month continue to be used for prediction error.

## Improving Your Forecast Error Management

How Functional is the forecast error measurement in your company? Does it help you focus on what products to improve the forecast? What if the forecast accuracy can be improved, by the product is an inexpensive item? We take a new approach in forecast error management. The Brightwork Explorer calculates no MAPE, but instead a monetized forecast error improvement from one forecast to another. We calculate that value for every product location combination and they can be any two forecasts you feed the system:

• The first forecast may be the constant or the naive forecast.
• The first forecast can be statistical forecast and the second the statistical + judgment forecast.

It’s up to you.

The Brightwork Forecast Explorer is free to use in the beginning. See by clicking the image below:

## References

I cover this topic in depth in the following book.

## Supply Chain Forecasting Software

### Providing A Better Understanding of Forecasting Software

This book explains the critical aspects of supply chain forecasting. The book is designed to allow the reader to get more out of their current forecasting system, as well as explain some of the best functionality in forecasting, which may not be resident in the reader’s current system, but how they can be accessed at low-cost.

The book breaks down what is often taught as a complex subject into simple terms and provides information that can be immediately put to use by practitioners. One of the only books to have a variety of supply chain forecasting vendors showcased.

The book also provides the reader with a look into the forefront of forecasting. Several concepts that are covered, while currently available in forecasting software, have yet to be widely implemented or even written about. The book moves smoothly between ideas to screen shots and descriptions of how the filters are configured and used. This provides the reader with some of the most intriguing areas of functionality within a variety of applications.

### Chapters

• Chapter 1: Introduction
• Chapter 2: Where Forecasting Fits Within the Supply Chain Planning Footprint
• Chapter 3: Statistical Forecasting Explained
• Chapter 4: Why Attributes-based Forecasting is the Future of Statistical Forecasting
• Chapter 5: The Statistical Forecasting Data Layer
• Chapter 6: Removing Demand History and Outliers
• Chapter 7: Consensus-based Forecasting Explained
• Chapter 8: Collaborative Forecasting Explained
• Chapter 9: Bias Removal
• Chapter 10: Effective Forecast Error Management
• Chapter 11: Lifecycle Planning
• Chapter 12: Forecastable Versus Unforecastable Products
• Chapter 13: Why Companies Select the Wrong Forecasting Software
• Chapter 14: Conclusion
• Appendix A:
• Appendix B: Forecast Locking
• Appendix C: The Lewandowski Algorithm.