Lead Time

Lead time is the amount of time it takes for a business to make whatever it is it makes from start to finish. If a company makes clothing, it’s the time from when the cloth, thread, and other materials enter the facility until they’ve been turned into finished shirts, pants, or jackets.

All value-added, non-value-added, and wasteful activities contribute to lead time. Consequently, it’s beneficial to reduce waste to shorten lead times.

Why is it important to have shorter lead times? When the lead time for a product is short, the company that makes it can hold fewer finished goods to fulfill orders. This is important because holding excess finished goods can result in higher costs associated with storage.

Consider this example:

If Company X receives an order from Customer Y for Product Z every 3 days, but lead time for that product is 5 days, the company will need to have extra inventory on hand to fill those orders. If the lead time is shortened to 3 days, however, the company no longer needs to hold that extra inventory to meet customer demand because production can keep pace with customer orders.

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