In the intricate world of wholesale, e-commerce, and retail order management, lead time is a pivotal factor in shaping customer trust and business credibility. From the moment someone purchases one of your products, the clock starts ticking, and how you fulfill orders can define whether you earn a loyal customer or a negative review.
Order lead time holds the key to a customer’s loyalty. A swift order fulfillment process keeps customers happy. However, navigating the delicate balance between speed and customer preferences can be challenging for e-commerce and even brick-and-mortar companies. That’s why understanding and optimizing order lead time is paramount.
Every minute saved in your order lead time, from maintaining inventory and processing invoices to pulling products from the warehouse and shipping out orders, is a step closer to customer satisfaction and loyalty. Stay ahead by mastering the art of efficient order lead time management with advanced inventory planning software like Inventory Planner. Read on to discover the secrets to impeccable order management.
What is the order lead time?
Order lead time is the amount of time between when someone orders your products and the fulfillment of that order. It is a crucial parameter for businesses to manage, as it can impact customer satisfaction and inventory management. It sounds simple, but there is a wide array of moving parts and systems that must be working in concert to achieve efficient order fulfillment.
The expectations for order lead time can vary depending on the industry and the types of goods being ordered. For example, make-to-order products usually take longer as they have to factor in production lead time. Production lead time is the time it takes from receiving raw materials to producing a final product. The lead time for make-to-order products typically begins after the customer places an order. Unlike ready-to-ship items, there’s no pre-existing inventory to fulfill the order immediately, so the order lead time must account for manufacturing lead time as well.
For example, if a candy shop places a product order with a Halloween candy supplier on August 4th and expects delivery by September 18th, the purchase order lead time is 45 days. During this time period, a variety of crucial steps must unfold, including order placement, shipping notice, order fulfillment, invoices, and necessary payments.
The store needs the candy in order to replenish its supply in time to meet Halloween demand. However, receiving their product order too early may result in increased days of stock, excess storage costs, deterioration, and a reduced bottom line. Any unforeseen delays in the fulfillment process can cause a supply chain reaction, leading to missed sales opportunities, angry customers, and idle workforce hours.
This is why precise lead time calculations and predictions are pivotal. Accurate planning regarding when, what, and how much to reorder is critical, safeguarding against costly disruptions and ensuring seamless operations. Planning is a necessity for sustained business success.
4 main types of order lead times [+ formulas]
There are 4 main types of order lead times: actual order lead time, requested order lead time, quote order lead time, and confirmed order lead time. Read below to find more details and lead time formulas for each:
Actual order lead time
Actual Order Lead Time (A-OLT) is the duration between receiving a purchase order and fulfilling those goods. It refers to the period between the receipt of the customer’s order (order entry date) and the delivery of the goods. Calculating A-OLT is pretty straightforward. In the formula, the delivery date is the day the order is received, while the order entry date is the day your purchase order was submitted to your supplier. (A-OLT) formula:
Actual order lead time = [delivery date – order entry date]
Requested order lead time
Requested Order Lead Time (R-OLT) is the duration between when an order is placed and when the customer wants delivery. R-OLT is a crucial parameter to judge an e-commerce company’s order management prowess. The requested delivery date is when you want the product order to arrive, while the order entry date is when you order your products.
Remember that R-OLT does not consider your vendor’s capacity to fulfill orders within that time limit. Before placing the purchase order, share this information with your vendor to ensure they can meet the request. It can assist you in meeting the needs or expectations of your client base while also improving your relationship with your fulfillment partners—all without the need to stockpile surplus inventory. Requested order lead time formula:
Requested order lead time = [requested delivery date – order entry date]
Quoted order lead time
Quoted Order Lead Time (Q-OLT) refers to the time between the order entry date and the delivery date promised in a contract between the supplier and the customer. It is the agreed-upon time between the supplier and the customer to deliver goods. The Q-OLT is an important metric for sellers to track because it helps them manage their inventory levels and meet customer expectations. Ideally, the Q-OLT should be as close to the actual order lead time (A-OLT) as possible. The quote date is the day the supplier agreed to deliver (as stated in the contract), while the order entry date is the day the order was originally placed.
Quote order lead time = [quote date – order entry date]
Confirmed order lead time
Confirmed Order Lead Time (C-OLT) is the agreed-upon lead time that a supplier has to fulfill orders. It is the time between the order entry date and the confirmed delivery date of goods. The confirmed date is the agreed-upon date by both the customer and the supplier, whereas the order entry date is the day the order was originally placed. Basically, the C-OLT assesses a company’s ability to hold up its end of the bargain. To calculate C-OLT, use this formula:
Confirmed order lead time = [confirmed date – order entry date]
What factors affect order lead time?
Lead time is a critical aspect of inventory planning, inventory management, and supply chain efficiency. Here are some of the most common circumstances that can impact order lead time:
- Inefficient inventory planning. Poor inventory planning and management is the most preventable issue that can result in longer lead times. Inefficient inventory planning processes make it difficult to accurately forecast demand, manage purchase orders, and maintain stock levels. Without the proper data and analysis, businesses will have a tough time keeping track of their inventory levels and reordering the right products in a timely manner. And without the right inventory processes, data, and systems in place, you can’t maintain efficient lead times.
- Seasonality. Seasonal fluctuations in demand can impact prices and lead times, and without dynamic forecasting that accounts for seasonal trends, retailers and suppliers may struggle to keep up with increased demand during peak seasons. This can lead to longer lead times, resulting in low inventory and potential stockouts.
- Manufacturing lead time. How long it takes for a vendor to produce the product can affect how you calculate order lead times. Buyers need to communicate with their vendors and stay updated on any changes to the manufacturing process to avoid being blindsided by changes, delays, or supply chain disruptions.
- Inefficient shipping. The shipping options used by a business can also impact lead time. If shipping is unreliable or delivery times fluctuate from order to order, it can result in increased lead times on orders and dissatisfied customers.
- Supply chain disruptions. Delays in the delivery of raw manufacturing materials or disruptions to shipping lanes can create supply chain disruptions and impact lead times. This can lead to delays in production, increased shipping times, and lags in stock replenishment.
Importance of Lead Time In Inventory Planning
Lead time is an essential component of inventory planning, and an important consideration that can affect your ability to reliably fulfill orders. Here are a few ways lead time can impact inventory planning:
Demand Forecasting
Calculating order lead time helps businesses estimate and forecast product demand. By understanding how long it takes to receive goods, businesses can plan their inventory levels accordingly and avoid stockouts.
Order Management
Lead time is crucial for order management, as it helps businesses plan and schedule their purchase orders. By knowing how long it takes to receive goods, sellers can create their POs to ensure they have enough inventory to meet customer demand.
Inventory Planner can help businesses streamline their order management by offering accurate demand forecasts, reliable PO recommendations, and supplier performance monitoring. By setting automated reorder points and optimizing safety stock levels, businesses can proactively restock products, reducing the risk of stockouts and minimizing lead times. Here’s how to set the lead time and days of stock on Inventory Planner with just a few clicks.
Supplier Management
Lead time is also important for managing suppliers. Understanding how long it takes for suppliers to produce and ship goods allows sellers to work with their vendors to negotiate prices, production processes, and payment terms to ensure they can meet their inventory needs.
Reduced Inventory Costs
By optimizing lead time, businesses can reduce their inventory costs. Knowing exactly how long it takes between reorders and delivery allows you to order goods closer to the time you need them, reducing how much and how long you must hold stock in your warehouse.
Improve Customer Satisfaction
A consistent and mutually agreed-upon time between purchase order placement and order delivery is essential for customer satisfaction. By optimizing lead time, sellers can ensure that they are able to deliver goods to their customers on time, helping to maintain customer trust and keep them from going elsewhere.
Unlock Your Business’s Full Potential and Cut Down Order Lead Time with Inventory Planner
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Don’t miss out on the chance to enhance customer satisfaction and boost your operational agility. Sign up for a free demo to witness firsthand how Inventory Planner can transform your business. Don’t wait, your path to streamlined order management starts here!