Lead Time – Definition

Cite this article as:"Lead Time – Definition," in The Business Professor, updated March 26, 2019, last accessed September 23, 2020, https://thebusinessprofessor.com/lesson/lead-time-definition/.

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Lead Time Definition

Lead time is a term that refers to the time between the beginning of the beginning and completion of a process. For example, in a manufacturing company, lead time is the time the company begins to manufacture a product and the time manufacturing is completed.

A Little More on What is Lead Time

The term lead time can be used in various aspects of life to describe the time period between starting and completing a process. For example, in the health sector, it can be used to refer to diseases. With regard to diseases, lead time refers to the time between diseases detection by screening and the time the research about its cause and effects are presented for diagnosis. The term is also commonly used in the supply chain management environment to mean the time between the placement of an order by the customer and the time the order becomes ready for delivery.  The term is used similarly in the manufacturing environment to mean the time the customer places an order of a product and the time the product becomes ready for delivery. However, in a manufacturing environment, it includes the time used for shipping the product to the customer. This time is included because the manufacturing firms need to know the availability of the materials to make a plan of the production and delivery.

In the supply chain the lead time is categorized into five aspects such as order lead time, order handling time, manufacturing lead time, production lead time, and finally the delivery lead time. Order lead time refers to the time an order is received from the customer and the time the order is delivered to the customer. Order handling time refers to the time the order is received for the customer and the time the ordered sale is created. On the same note, manufacturing lead time refers to the time between the creation of sales order and the time the production is completed. Similarly, the production lied time is the time between the beginning of production and the time of completion of the production. Lastly, the production lead time refers to the time the production is completed and the time the product is delivered to the customer.

In other words, lead time refers to the total time that is needed for product manufacturing. The product manufacturing time includes preparation for the order, inspection time, move time and run time. In the situation of make-to-order, lead time refers to the time taken to move the order from the production after the completion of the manufacturing and the shipment of the product.

References for Lead Time

Academic Research on Lead Time

Inventory models involving lead time as a decision variable, Ben-Daya, M. A., & Raouf, A. (1994). Journal of the Operational Research Society, 45(5), 579-582. This paper examines various models that involve lead time as a model for decision making. However, according to the author, the concept of lead time has been ignored by many kinds of literature that discuss issues related to inventory.  The author presents that the lead time can be minimized at a lower cost.

Mixture inventory model with backorders and lost sales for variable lead time, Ouyang, L. Y., Yeh, N. C., & Wu, K. S. (1996). Journal of the Operational Research Society, 47(6), 829-832. This paper discusses the mixture inventory model and its application in the inventory decision making.  The study used the concept of Ben-Daya to evaluate the lead time and order quantity as the most important variables for the inventory decision making. The study was also based on the assumption that shortages were allowed and the models were extended by including the stockout cost.

An analytical determination of lead time with normal demand, Liao, C. J., & Shyu, C. H. (1991). International Journal of Operations & Production Management, 11(9), 72-78. This paper presents the analysis focus to determine the lead time with normal demand.  According to the author, most of the inventory models ignore the concept lead time and assume that the lead time cannot be controlled. However, this study presents that lead time can be controlled by shortening it by incurring extra cost to reduce inventory investment, increase customer service delivery, and improve the responsiveness of the system. Although many literature recognizes the benefits of short lead time and recommends that it should be part of the management control variable, the issue of controlling lead time has been given no or less concern.

From supply chain to demand chain: the role of lead time reduction in improving demand chain performance, De Treville, S., Shapiro, R. D., & Hameri, A. P. (2004). Journal of Operations Management, 21(6), 613-627. This paper examines the role of shortening the lead time in improving demand chain performance. According to this article, improving the demand chain performance requires the supply chain stakeholders to focus on the mechanism to reduce the lead time or focus on improving the transfer of the demand information upwards. The article, therefore, proposes the mechanism of making the lead time reduction a priority in the improvement of the demand chain projects.

Mixture inventory model involving variable lead time with a service level constraint, Ouyang, L. Y., & Wu, K. S. (1997). Computers & Operations Research, 24(9), 875-882. This paper discusses the mixture inventory model. The author presents that quantity order and the lead time are the most important variable for decision making in the mixture inventory model. The study assumes that demand lead time is based on a normal distribution in which the min-max distribution model was used to solve the problem related to lead time.

Integrated single vendor single buyer model with stochastic demand and variable lead time, Ben-Daya, M., & Hariga, M. (2004). International Journal of Production Economics, 92(1), 75-80. This paper investigates the concept of lead time about the single buyer single vendor model that is associated with stochastic demands.   The study considers the use of the single vendor and single buyer model and integrates the problems related to the production inventory. The study is based on the assumption that there is linear variation in the lead time with the size of the lot.

A study of an integrated inventory with controllable lead time, Pan, J. C. H., & Yang, J. S. (2002). International Journal of Production Research, 40(5), 1263-1273. This article presents a study of an integrated inventory with a lead time which can be controlled. According to the author, Just-in-time model has confirmed that the reduction of lead time has many advantages and benefits that are associated with the cost of inventory. The study discovered that the lead time duration has a direct effect on the level of the customer service, safety stock investment, and competitive business ability. In this regard, it is important for the business dealing in the inventory to focus on reducing the lead time.

The bullwhip effect—impact of stochastic lead time, information quality, and information sharing: a simulation study, Chatfield, D. C., Kim, J. G., Harrison, T. P., & Hayya, J. C. (2004). Production and Operations Management, 13(4), 340-353. This paper examines the impacts of stochastic lead time, sharing of information and the quality of information on the supply chain. The study was based on the simulation model known as SISCO to determine the impacts of these factors on the supply chain. The study revealed that the variability of the lead time aggravates the implications of variance on the supply chain. The paper further discovered that implication of variance depends on the level of information sharing in the organization.

Determining safety stock in the presence of stochastic lead time and demand, Eppen, G. D., & Martin, R. K. (1988). Management Science, 34(11), 1380-1390. This paper seeks to determine the safety stock particularly in the stochastic demand and lead time. The study considered safety stock setting problem when using random variables of lead time and demand.

Some stochastic inventory models with deterministic variable lead time, Hariga, M., & Ben-Daya, M. (1999). European Journal of Operational Research, 113(1), 42-51. This paper presents a discussion regarding the optimal reduction in the supply chain lead time period. The study developed a model with partial and complete information regarding lead time demand distribution. The study analyzed periodic reviews and classical continuous models that comprise of a mixture stochastic model.

Sole versus dual sourcing in stochastic leadtime (s, Q) inventory models, Ramasesh, R. V., Ord, J. K., Hayya, J. C., & Pan, A. (1991). Management science, 37(4), 428-443. This paper presents the analysis of dual sourcing with regard to outweighing the rise in the order cost. The authors present that when there is uncertainty in the supply lead time, the simultaneous supply chain from dual sources helps in saving the ordering cost and the inventory holding.

Integrated vendor–buyer cooperative models with stochastic demand in controllable lead time, Ouyang, L. Y., Wu, K. S., & Ho, C. H. (2004). International Journal of Production Economics, 92(3), 255-266. This article discusses an integrated single-vendor single-buyer integrated production inventory model. The study was based on the assumption that lead time demand is stochastic and deterministic. The paper demonstrated the benefits of the integration model in the supply chain environment.

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