Lead time meaning: definition, types and how to reduce it

Long lead times can create friction in your operations. Streamlining processes allows you to deliver faster, build stronger relationships and increase sales.

In this article, you’ll learn lead time’s meaning, how to calculate it and how to reduce it to keep customers buying from you.

What is lead time?

In other words, lead time is the total time required to complete a process from start to finish. Companies track and try to reduce lead times as part of their manufacturing or supply chain management.

For example, you can measure how long it takes from when an order is placed to when customers receive products or services. You can also track the time required to turn raw materials into finished goods.

Lead times can also differ depending on whether you sell physical or online products. For example, an order for 200 custom-made bicycles may have a total lead time of 16 days:

• Two days to process the order

• Nine days to manufacture the bikes

• Five days to ship them to the store

On the other hand, a customer requesting online webpage design may experience a lead time of six days:

• One day to set up the account

• Two days to process the order

• Three days for the designer to create the product page

Understanding lead time is crucial for efficient supply chain management and increasing profitability. It helps businesses manage customer expectations and ensure they have enough inventory to reduce delays.

Lead time vs. cycle time

Lead time and cycle time are related but different concepts in supply chain operations. Lead time refers to the entire period from order to final delivery (e.g., ordering a laptop and receiving it at your door).

On the other hand, cycle time focuses on the duration of a specific process or task within that overall workflow (e.g., manufacturing a single laptop on the production line).

Here’s how the two compare:

While lead time is crucial for improving operational efficiency, there is more than one type you should track.

6 different types of lead time and why each is crucial

Each type of lead time serves a unique purpose in your supply chain. Measuring and improving them all can increase productivity, reduce delays and delight customers.

Here are six crucial examples of lead time and why you should track each:

1. Order lead time

Order lead time is the period between when a customer places an order and when they receive the goods or services. The stages involved also include supplier processing and shipping times.

For example, a manufacturer may take 18 days to produce and deliver 500 custom chairs to a customer.

Tracking order lead time is crucial for managing customer expectations and ensuring timely delivery. Knowing how long orders take from start to finish helps you better plan inventory and schedule production to deliver products when promised.

2. Production lead time

Production lead time (or manufacturing lead time) is the time required to create a product. It spans from the moment production starts (with raw materials) until completion (the finished goods).

For example, a factory may take four days to create, assemble and package a bespoke office desk.

Reducing production lead time helps you operate more efficiently, increase capacity and respond quickly to customer demands or market changes. It also allows manufacturers to meet deadlines and consistently reduce bottlenecks.

3. Delivery lead time

Delivery lead time is the period from when you ship a product to when it reaches the customer or end-user. Delivery stages include transportation, handling and customs processes.

For example, a retailer with a delivery lead time of 22 hours may offer next-day delivery for clothing ordered before 1 PM.

Faster delivery lead times are crucial for e-commerce businesses, where customers often expect rapid delivery. However, faster deliveries can make customers happier and give you a competitive advantage.

4. Procurement lead time

Procurement lead time is the period between identifying a need for a product or service and receiving it from a supplier. It involves the entire purchasing process, from inquiring to receiving the goods.

For example, the procurement process for steel may take three weeks from requesting a quote to receiving it because of lengthy negotiations.

Efficient procurement minimizes supply chain disruptions and keeps production schedules on track by ensuring materials or components are available when needed.

5. Material lead time

Material lead time is the time it takes your company to order raw materials or components (after selecting a supplier and negotiating) until they’re with you and ready for production use.

Supplier processing, transportation and shipping or customs clearance times can impact material lead time. For example, a retail factory may have to wait two weeks to receive raw cotton for clothing.

By managing material lead time effectively, companies can ensure smoother production and avoid costly delays.

6. Cumulative lead time

Cumulative lead time encompasses all other lead times (e.g., order, production, delivery and procurement). For example, the cumulative lead time from placing an order for custom artwork to receiving it could be 21 days.

Understanding the total time all processes take helps you plan operations and manage supply chains more effectively.

Having a general picture of your end-to-end processes means you can make better data-driven decisions about stock or delivery promises.

Why is it important to have a short lead time?

A short lead time is essential to stay competitive in today’s fast-paced market. It helps you respond quickly to customer demands, free up cash and stay agile.

Here are four reasons why reducing longer lead times is crucial:

1. Makes customers happier

Short lead times ensure customers receive your products or services as fast as possible, improving their trust and overall experience with your brand.

Customers value speed and reliability. For example, Digital Commerce 360 research suggests that fast delivery is a top deciding factor for consumers when choosing where to spend their money.

When you meet or exceed people’s expectations, they’re more likely to buy again or recommend your business to others.

Studies also suggest that early deliveries in quick commerce (e.g., meals and groceries that take minutes rather than days) positively impact repurchase behavior, while late deliveries harm it.

2. Increases cash flow

Short lead times help accelerate production cycles so you get paid sooner after fulfilling orders. A steady cash flow means you can be better prepared for unexpected expenses (e.g., a sudden increase in raw material costs or emergency repairs).

It also allows you to grow your business sustainably. For example, you may choose to:

• Reinvest in your operations (e.g., expand your team or adopt new technology)

• Pay suppliers faster to strengthen relationships (e.g., get priority shipping or bulk pricing)

• Offer better payment terms to drive sales (e.g., provide flexible options like discounts for early payments)

More readily available cash can reduce economic strain on your business and give you more financial freedom.

3. Reduces inventory costs

Shorter lead times mean you can hold less inventory and lower the costs associated with large stock levels. For example, you could move to a smaller, cheaper warehouse.

According to APQC research, the average business spends 10% of the annual value of their inventory to store it. However, this can be as high as 15%.

Lean inventories can also lower insurance premiums or taxes on your stored goods. They also reduce the risk of products spoiling or getting damaged from sitting in warehouses for too long.

For industries dealing with perishable goods or products with short life cycles (e.g., technology or fashion), this can significantly impact profitability and waste reduction.

4. Keeps operations flexible

A short lead time allows you to quickly adjust to changes in demand, market conditions or supply chain disruptions.

This flexibility means you can ramp up production when demand spikes or scale back to avoid overproduction during downturns (e.g., in the face of pandemics or natural disasters).

For example, the backlog of cargo traffic when one of the world’s largest shipping containers got stuck in the Suez Canal in 2021 caused businesses around $10 billion in daily losses.

Trends and consumer preferences also shift rapidly. Responding quickly can help you capture emerging opportunities (e.g., launching new product lines during seasonal trends) to stay competitive.

How to calculate lead time: lead time formulas

You can manually calculate the total time required to complete different processes (e.g., orders or production) or use digital tools.

Calculating the time each of your processes takes from start to finish helps you understand how efficient they are and where you can improve.

For example, you may find that order processing takes longer because of slow supplier response times. This information highlights the need for improved communication or alternative sourcing strategies.

The basic formula for calculating order lead time is:

You can work out how many days or hours each of your lead times take with these calculations:

Here are five steps to calculate each type of lead time in more detail:

• Identify process stages. Start by determining the specific stages of your lead time calculation (e.g., order placement, production or shipping).

• Collect data. Gather relevant information and metrics for each process stage (e.g., timestamps for production start and finish) to ensure accurate calculations.

• Add up times. Sum up each stage’s duration to measure the total lead time from start to finish.

• Account for variability. Consider any factors affecting lead times (e.g., seasonal fluctuations or supplier reliability) to ensure your calculations reflect real-world scenarios.

• Calculate manually or using tools. Choose the method that best suits your operational needs and complexity (e.g., manual formulas or automated software).

The numbers you start with will become your benchmarks. From there, you can implement strategies to reduce them by streamlining each stage or process.

7 ways to reduce lead time to deliver products faster and enhance your CX

Reducing lead times can help you enhance your overall customer experience and keep buyers returning.

Here are seven tips to reduce long lead times:

1. Streamline order processing, transportation and logistics

Optimizing how you receive, process and transport orders can reduce delays caused by manual workflows.

Automating these processes helps speed up customer orders, reducing lead time. It also allows materials or finished products to reach their destination faster.

For example, you can use standardized order forms to minimize errors and prevent back-and-forth communications that cause delays. You could also use software that groups orders into larger, more efficient shipments and sends them on the fastest and most reliable routes.

Implementing an automated order management system helps you speed up fulfillment and processing times by automatically routing orders and generating real-time updates.

You should also choose logistics partners that offer real-time tracking and use technology to optimize delivery routes.

Integrating this software with your suppliers’ systems and customer relationship management (CRM) platform can also improve coordination and speed up response times along the supply chain.

For example, a logistics CRM system like Pipedrive can automate customer notifications when processing or shipping purchase orders.

You can use third-party integrations like Beeline Routes to optimize routes from within your CRM.

You can also organize your logistics activities into pipelines to track fulfillment and allow your sales team to communicate proactively with customers about order statuses.

2. Use local suppliers

Sourcing from local suppliers means faster deliveries, significantly reducing procurement and material lead times. Shorter transportation distances also help reduce shipping fees and unpredictable customs delays.

For example, you might find a local business that can deliver critical components within 24 hours, compared to over a week from your usual overseas vendors.

Local suppliers have other multiple benefits, including:

• They may be able to respond more quickly to urgent orders (e.g., from a sudden spike in demand)

• Shorter transit times reduce the risk of damage to goods during shipping and can help maintain quality control

• Minimizing transportation distance can lower your company’s environmental impact and contribute to corporate social responsibility (CSR) efforts

CSR is a growing priority for many businesses and customers. Deloitte research suggests that a quarter of consumers are prepared to pay more for sustainable brands.

To find suitable local suppliers, use search engines, create a list and read reviews to vet each company’s capabilities.

When you start working together, establish clear performance metrics (e.g., on-time delivery rates, quality assurance scores and responsiveness). Regularly evaluate these to ensure everyone consistently meets quality and timeliness expectations.

3. Hold safety stock

Keeping a buffer of critical materials ensures you can stick to regular lead times even when faced with delays. Safety stock acts as a cushion, preventing stockouts (inventory shortages) that can halt production and lead to lost sales or dissatisfied customers.

For example, you may always keep an extra two weeks’ worth of raw materials on hand in case of emergencies.

According to Netstock research, long and variable lead times are two of the top challenges for small and medium-sized businesses, with 72% facing unpredictable delivery times.

To avoid stockouts and maintain regular production times, you must first analyze demand patterns, lead time variability and supplier reliability.

Analyzing these factors helps determine your optimal safety stock levels, ensuring you don’t hold too much inventory (which ties up capital) or too little (which could lead to shortages).

Inventory management tools (e.g., MRPeasy or Workday) can help you track stock levels in real time and automatically reorder materials when levels fall below a set threshold.

These digital tools can streamline replenishment processes to keep your supply chain flowing.

4. Work on improving supplier relationships

Suppliers who value your business are more likely to help you maintain a reliable supply chain and shorter lead times.

Strong relationships can lead to priority treatment, faster responses and collaborative problem-solving when challenges arise.

Suppliers that see you as a critical partner may also be more inclined to go above and beyond. For example, they may accommodate urgent requests, prioritize your orders during busy periods or provide early access to new materials.

To strengthen supplier relationships:

• Maintain clear and consistent communication channels

• Check in regularly so you both stay aligned on expectations

• Work together to resolve issues like shortages or reordering delays quickly

• Negotiate long-term contracts to let them know you’re committed to a lasting collaboration

While loyalty builds trust, backup suppliers are essential if your primary supplier can’t meet your needs. In addition to improving your supply chain’s resilience, backups can give you negotiation leverage as everyone knows you have other options.

5. Implement just-in-time (JIT) inventory management

Just-in-time (JIT) inventory management is a strategy that ensures you only receive materials when you need them in the production process. The goal is to minimize the time inventory spends sitting in storage to cut lead time and reduce holding costs and waste.

Aligning material deliveries more closely with production schedules reduces the time between receiving and using them. However, it means you have to be able to respond more dynamically to customer orders.

For example, Toyota began reducing car assembly times and avoided stockpiling by only producing parts when necessary.

Here’s what JIT delivery looks like in practice.

JIT requires several factors to be successful:

• You must be able to work closely with reliable suppliers that can deliver on-demand

• Materials must arrive exactly when needed, with little to no delay

• Regular communication and monitoring performance are vital to maintaining precise timing

You should also invest in supply chain software that tracks real-time inventory. These digital tools can automatically trigger material orders based on production levels, so you always have what you need.

Additionally, contingency plans are vital for handling unexpected demand surges or supplier inefficiencies.

6. Reduce production cycle time

Through process improvements and automation, you can reduce the time it takes to create products. Faster production means faster delivery, naturally reducing overall lead times.

For example, you may identify bottlenecks in your production line (e.g., a particular machine that causes delays and inefficient workflows) that slow down the entire process.

Once you pinpoint these problems, you can implement lean manufacturing principles. These methods reduce waste and improve productivity by eliminating non-essential tasks and only focusing on activities that add value.

Automation is an excellent example of a powerful way to speed up repetitive or time-consuming manufacturing processes.

According to one study, implementing robotics or automated assembly lines that work 24/7 can dramatically improve production speed by as much as 30%.

Production software can also help managers track workflows, spot problems and make quick changes to reduce delays and mistakes. Regularly reviewing and refining these processes ensures you’ll keep improving them.

7. Use advanced forecasting software

Accurate demand forecasting is critical for smoother production schedules and shorter lead times. Advanced forecasting software predicts material and order needs more effectively, avoiding delays caused by waiting for supplies or bloated inventory levels.

Better forecasting also creates more efficient procurement processes and production scheduling. For example, real-time forecasting tools can immediately adjust material requirements if you receive a spike in orders.

Sales forecasting software like Pipedrive can help you analyze past trends, seasonal fluctuations and market shifts to more accurately predict future demand.

Colorful reports also allow you to visualize how these factors impact revenue.

By reviewing historical data, sales reps can identify patterns to help other departments make better decisions, such as slowing down production during quieter seasons.

These insights also reduce the risk of stockouts or overstocking, which can lead to inefficiencies and longer lead times.

Sales teams can also dive into each ongoing deal and the expected close date.

By focusing on deals likely to close soon, salespeople can reduce approval delays, expedite order processing and shorten the lead time from inquiry to delivery.

Final thoughts

Reducing lead time helps make customers happier with fewer delays and more reliable order fulfillment.

Calculate your current lead times to establish baseline figures before implementing tactics to improve them. This will allow you to see which has a positive or negative impact.

Streamlining order, production and delivery processes requires a robust tech stack. Try Pipedrive free for 14 days to learn how it can help you stay ahead of demand and track shipments every step of the way.