What is Lead Time in Ecommerce?
Lead Time in Ecommerce
Overview of Lead time
With the rise in ecommerce and online shopping, customers have come to expect faster and more reliable delivery and order fulfilment. These expectations have become a challenge for ecommerce businesses as delays in order processing may lead to loss of sales. Hence it is necessary to use efficient inventory management and appropriate metrics to ensure faster order processing. One such useful metric is lead time.
What is lead time?
The term ‘lead time’ simply means the time it takes from when a purchase order is generated to the delivery of the order at the customer’s doorstep. Each stage of your supply chain has its own lead-time. Some of the lead times in supply chains are:
Material lead time: It refers to the time taken to transport the required raw materials to the place of manufacture. It is the time taken in the production process of the product.
Production lead time: It refers to the time it takes the product to reach from the factory or supplier to the business’ warehouse.
Customer lead time: It refers to the time it takes for the customer to place their order and when they receive it.
These three combine to form the cumulative lead time it takes for a business to fulfil its orders.
Lead time is an essential metric as it helps the business to implement different inventory management strategies.
How is lead time estimated?
Lead times are calculated or estimated using two main factors; reordering delay, and your supply delay.
Reordering delay: refers to the time it takes for the manufacturer or supplier to process the purchase order.
Supply delay: refers to the time it takes for the supplier to manufacture and ship the inventory to the business’ warehouse.
So lead time can be calculated as;
Lead time= reordering delay + supply delay
What are the factors affecting lead times in ecommerce?
There are several factors that affect lead times in ecommerce such as:
Stockouts- Stockout refers to the unavailability of raw material to produce or manufacture an order. Miscalculating lead time can result in stockouts that can increase lead times.
Shipping delays- Delay in shipping can also increase lead times.
Unnecessary internal processing or delay in order processing.
Disorganized and untracked inventory or inefficient inventory management.
Why are shorter lead times preferable?
It is generally preferable for ecommerce businesses to have shorter lead times as it means that the customers are more satisfied and happier. Reduced lead times also provide other benefits to the online store, such as;
Having less inventory- With less inventory, you can maintain a leaner warehouse and optimize your inventory management.
Improve ‘cash at hand’ situation- Shorter lead times also help to maintain cash liquidity and replenish inventory faster.
Flexibility- Shorter lead times also allow more flexibility to adjust to sudden shifts in the market trends.
Seasonality- Shorter lead times also help to be ready for seasonal selling windows.
Competitive edge- Shorter lead times give ecommerce businesses an edge over their competitors in terms of customer service and order fulfilment.
How to optimize your lead time?
As we know shorter lead times are extremely important for a more efficient supply chain. Here are some ways in which an ecommerce business can optimize and reduce its lead time:
1. Changing to more efficient shipping methods.
2. Use locally available materials and labour.
3. Automate ordering processes and inventory management.
4. Reduce non-value added activities
5. Establish contracts with suppliers that include timeframes and offer them incentives.