What it is:
Lead time is a crucial part of managing a manufacturing business or any business that involves waiting for supplies or products to arrive. Generally, the lower the lead time, the more flexible a company is and the faster it can respond to changes in trends. However, shorter lead times can cost more money if the buyer has to pay for overtime, expedited shipping costs, or other rush charges. This in turn makes it difficult to say whether shortening lead time increase profits, though it usually will increase customer satisfaction.
How it works (Example):
For example, let's say Company XYZ makes and sells widgets. It has a customer, ABC Company, that wants to buy 10,000 widgets toin its retail stores in October for the Christmas season.
It takes two weeks to get the widget parts and a week to assemble 10,000 units, so Company XYZ has a lead time of about a month. That means that it must get the order from ABC company no later than September 1 in order to make the delivery on time.
Why it Matters:
Lead time is the amount of time between ordering something and receiving it.