What Is Order Lead Time?
Order lead time is the amount of time it will take the supplier to have your order ready for delivery from the day you place your order.
If you place your order on 1st of Jan and your order will be ready for dispatch by 1st of Feb, then the order lead time is one month.
Is It That Important?
Yes it is.
Depending on the order lead time you will have to plan your buying, inventory planning and also your buying budget.
Not only is it important to know when you have to place your orders, in order to receive them on time, but also it will affect the level of accuracy you have to plan your buying budget and forecasts with.
If you have to place your orders 6 months in advance, then it means you need to have a pretty much accurate picture of how your sales are going to perform for a year ahead. And this in itself is a challenging task.
On the other hand, if you only need to place your orders 3 weeks in advance, then the number will be easier to predict and also small enough to be rectified if any mistakes happened. If you end up with lower sales, then you can just skip the order for next month. If you end up with lower inventory, then you can make a new order and receive it within 3 weeks. The amount of sales you might have lost during this time will be relatively low, when compared to a 6 months period.
Factors Affecting Lead Time
For small retailers, the main factor that will determine how fast you will receive your order is the type of supplier your are ordering from.
If you are buying directly from a factory (manufacturer) then you can expect the order lead time to be high, up to 6 months. If, on the other hand, you are ordering from a wholesaler or distributor then it is safe to say you can receive it within weeks.
Another thing that will affect your order lead time is how robust your supplier’s business and operation is. That’s why I mentioned in the beginning that it is part of the due diligence process when evaluating suppliers.
Your supplier might have a short lead time on paper but, due to a lot of bottlenecks and delays in their operations, you will end up with a totally different time. Such mistakes could be tolerated and expected only at a minimal level.
It should also be noted that order lead time here does not include shipping time, so you need to factor this in your planning as well, which will then be called Delivery Lead Time. Some orders might be available for shipping within a week, but will take 2 months to arrive, if you are shipping them by sea and some more time to go through custom clearance. This has to do with your preferred shipping method, and not with your supplier’s process.
Of course this will affect your business as we will show below.
How Does Order Lead Time Affect My Business?
Order lead time and its accuracy can affect both, your sales and profits.
You might miss your sales budget if your products are not arriving on the time they were planned to arrive at. This could be failure of planning from your side or from the supplier’s side.
Furthermore, you could start losing market share, as customers will start shifting to the competition and this will affect even future sales to come.
You might opt to choose a supplier with shorter lead time for obvious reasons that we mentioned here, but you should take into considerations that this might affect your profitability.
You cannot expect to get the same margins when you order from the factory vs when you order through a distributor. The more layers & middle men you add, the higher the price and the lower your end margins.
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