1) What is Lead Time in eCommerce?
The concept of Lead Time in eCommerce varies depending on the context used. However, in general terms, we can define it as the total time an eCommerce seller takes to fulfill a customer’s order from the moment they place it to the seller until the time they receive the package.
For eCommerce retailers, lead time usually consists of two parts:
- The time it takes for SKUs to arrive at warehouses or fulfillment centers from suppliers or manufacturers.
- The time retailers take to deliver the order to its destination is calculated from when a customer places the order online.
Calculating lead time is essential in inventory control and supply chain management to regulate delays and progress with on-time deliveries.
2) How is Lead Time Measured?
The concept of Lead Time has a wide range of applications, from production, warehouse management, and order fulfillment to delivery. But, here we present the most commonly applied lead time calculation method:
There are two factors in processing lead times: reordering delay and supply delay.
Reordering delay accounts for the time, it takes retailers to process orders in their system from the point of accepting them.
Supply delay accounts for the time it takes for suppliers to ship products to warehouses (procurement), prepare them, and ship them for delivery.
Here, lead time is the sum of the reordering and supply delays.
Retailers can also use this formula: Date of product delivery-date or order request.
3) What are the Components of Lead Time?
There are six components of Lead Time:
3.1) Pre-processing period
This period comprises the time taken by the enterprise to receive an order, comprehend it, and generate a purchase order for the product requested by the customer.
3.2) Processing period
This period comprises the time taken by the enterprise to manufacture, assemble, or procure the product that is requested by the customer.
3.3) Stand-by Period
This period comprises any time between production, assembly, or procurement cycles.
3.4) Inspection Period
This period comprises the time taken by the enterprise to inspect the type, quality, and other requisites of products requested by the customer.
3.5) Storage Period
This period comprises any time spent while the product is stored at a warehouse before it is dispatched for further distribution or last-mile delivery.
3.6) Transit Period
This period comprises the time taken by the enterprise to move the product to warehouses, distribution centers, and delivery agents and during the last mile to the end consumer.
4) What are the Different Types of Lead Times?
Generally, there are four different types of lead times in eCommerce, corresponding to four stages in the supply chain:
4.1) Material Lead Time
This is the time a supplier takes to provide raw materials and components to the factory or manufacturing site for production. Material Lead Time is central in estimating production line shortages.
For eCommerce companies like D2C or dropshipping businesses, material lead time is a significant factor in managing their supply chain.
4.2) Production Lead Time
This is the time a manufacturer takes to produce the products at the purchase orders of retailers and ship them to warehouses.
There are several steps in the production cycle: preparation, set-up, production run, moving the products, inspection, stocking, etc. This concept accounts for the buffer time needed in pre-production, production, and first/second-mile logistics.
4.3) Customer Lead Time
This is the time frame between order placement and customer delivery. Several processes are involved, from order processing, replenishing inventory, picking, packing, shipping, and delivery.
eCommerce companies have the maximum control over this lead time, and with apt strategies, they can shorten the time needed for order fulfillment.
4.4) Cumulative Lead Time
It is the sum of manufacturing, production, and customer lead times. Overall it estimates all the time frames in the supply chain, from material procurement to last-mile delivery. In other words, cumulative lead time can span across countries and time zones.
For example, yarns procured from China are sent to Bangladesh to make clothes, and finally, the end product is stocked in a warehouse in the U.S. for an eCommerce brand.
5) What Factors Affect Lead Time in eCommerce?
Each lead time influences production and cash flows. Lead times eventually influence how you quickly stock inventory, replenish them, and fulfill orders. Here we list some common factors that impact lead times in eCommerce:
5.1) Seasonality and Customer Demand
The eCommerce industry is sensitive to seasonal customer demands like holiday seasons, Black Friday Sales, and other occasions around the globe. There are fluctuations in demand at certain times of the year, like October to December, resulting in an influx of demand.
Seasonality plays a massive role in longer lead times, especially in order fulfillment and faster deliveries if eCommerce retailers are not prepared beforehand.
5.2) Shortages and StockOuts
Stockouts are situations where inventory runs low or is exhausted, so eCommerce stores can’t meet customer demand. Stockouts can happen at any stage of the supply chain. For example, yarn shortages will eventually impact the production of clothes for brands.
While there may be cases where retailers can’t directly control stockouts, it can also happen if they miscalculate the time for stock replenishment. This can lead to longer customer lead times.
5.3) Supply Chain Disruptions
Supply chain disruptions like unexpected reasons, natural disasters, cash flow crises, anthropogenic events, and production crises impact lead time. Unforeseen circumstances like pandemics, floods, or hurricanes can halt production or damage inventory, disrupting the supply chain.
Similarly, events such as holiday shutdowns in certain global manufacturing countries such as China also extend to manufacturing and shipping delays.
5.4) Shipping Delays
Shipping delays can happen in the first-mile, second-mile, or last-mile logistics. From customs holdups to route congestion, there can be multiple reasons for shipping delays.
5.5) Ineffective Inventory and Warehouse Management
Running out of stock without any backup, untracked inventory, and lost supplies are indications of ineffective inventory management. Similarly, labor shortages and manual and unplanned picking point to inadequate warehouse management.
Since warehouses or fulfillment centers are central to strategically managing lead times, inefficiencies can lead to longer lead times.
5.6) Complicated Operations and Procedures
Longer approval times, manual and lengthy processing times, and extended customs procedures are telltale signs of complicated procedural delays. Complex procedures ultimately affect how organizations manage their time and proceed after a purchase order is placed. This factor directly affects customer lead time.
6) What are the Benefits of Reducing Lead Time?
Shorter lead times directly affect customer satisfaction and a lean supply chain. Here are some concrete benefits of a shorter lead time for eCommerce businesses:
6.1) Lower Stock-Out Chances
Lead times are specific indicators of inventory flow. By calculating and tracking the various order lead times, eCommerce retailers can identify the gaps in inventory management. Periodic reviews will eventually help in controlling the risks of stockout chances.
6.2) Amplify Customer Satisfaction
It is without a doubt that customers prefer brands that fulfill orders fast and expedited delivery. Therefore, shorter lead times like two-day or next-day deliveries are high selling factors for customer retention and re-purchases. Even on-time delivery is a significant factor that contributes to customer satisfaction.
6.3) Prevent Delivery Delays and Issues
ECommerce companies can accurately calculate lead times and prevent delivery delays and unpleasant customer experiences. Also, by monitoring lead times, eCommerce retailers can keep track of SLA commitments.
6.4) Increase Brand Reputation
Shortened lead times are an excellent brand reputation-boosting factor that presents a competitive advantage for any eCommerce brand. Faster fulfillment and delivery is the hallmark of customer satisfaction, translating to customer loyalty.
6.5) Effecient Supply Chain Operations
Shorter lead times create leaner warehouses, just-in-time production, and inventory management. The efficiency of all stakeholders and processes involved in lead times, from manufacturers to courier agents, results in an efficient supply chain.
6.6) Generate Profits
Shorter lead times eventually bring the long-term result of increasing customer lifetime value, i.e., the overall spending of a customer on a brand in a given time period. Brands can generate more profits by retaining customers, getting rid of dead stockpiles, faster replenishment, and more sales.
7) How to Reduce Lead Time for Customer Loyalty?
Lead time is a critical metric for eCommerce companies to maintain operational efficiency, enabling them to make strategic business decisions. Hence, reducing lead time is a central quest for many eCommerce brands.
7.1) Strategic Order Production and Fulfillment Methods
It is often observed that larger order quantities take longer production and shipping time. While large production orders may have their benefits (such as discounts), it eventually leads to longer production lead times.
Therefore, requesting smaller orders at regular intervals from manufacturers gets production in rhythm and inventory rolling in time. This way, eCommerce stores can create an agile inventory cycle that keeps pace with market demand without the risk of stockouts.
Moreover, companies can also try strategic fulfillment methods like splitting inventory, kitting, or bundling. These methods allow warehouses to pick, pack and ship frequently ordered SKUs.
7.2) Improve Shipping Methods
Inefficient shipping methods play a big part in escalating lead times. Depending on the procurement plan, location and budget, retailers can choose to move from ocean freight to air freight with shorter transit times for shipping.
However, air freight is expensive. Therefore, retailers can also choose intermodal or multimodal freight systems. This way, they can take advantage of railways, airways, and ocean containers for sourcing and shipping for the optimal lead time.
7.3) Use Automation and Saas Tools
Automating processes like ordering, inventory replenishment, and invoicing can replace long-drawn manual processes with an efficient system. Using SaaS tools for inventory, warehouse, order management, and shipping reduces human errors, miscalculations, and time consumption.
7.4) Local Sourcing and Supplier Relationships
Locally procuring materials or merchandise has its perks; the most important is shorter inventory replenishment lead times. Moreover, local sourcing helps retailers avoid transport-based disruptions and recover faster from unexpected events like weather conditions.
However, local sourcing isn’t always possible. Therefore, it is essential to maintain open communication with suppliers and distributors. This involves establishing contracts with stated timeframes for production and delivery.
By ensuring a time-bound contract, retailers can get delay alerts in advance, hold suppliers accountable, and have backup suppliers in emergency cases. Sharing data such as KPI metrics and demand forecasting outcomes keeps them in the loop with customer expectations and supply performance.
7.5) Outsourcing
As businesses grow and have multiple sales channels or adopt an omnichannel retail model, it may become difficult to manage everything in-house. Therefore, outsourcing to 3PLs (third-party logistics) or 4PLs (fourth-party logistics) can ensure streamlined order fulfillment with shorter lead times.
7.6) Eliminate Redundant Processes
Eliminating redundant value-added steps will reduce lead times. Scrutinizing the value chain can shed light on wasteful activities like complicated admin workflow. Or a long process for order processing and approval. By reducing or automating such processes, retailers can reduce lead time.
8) Conclusion
Lead time is a valuable metric that determines production, selling, sourcing, shipping, and delivery. In other words, it highlights the critical timeframe for an eCommerce company to work toward an effective supply chain. Moreover, they can achieve customer satisfaction and profits by employing best practices in reducing lead times.
9) FAQs
9.1) How to avoid Lead Time Mistakes?
Retailers can avoid longer lead times by monitoring lead time metrics, such as supply or reorder delays. Also, establishing a definitive contract with suppliers will ensure that retailers have specified delivery time frames, early delay alerts, and penalties to hold suppliers accountable.
9.2) Is Lead Time the same as Transit Time?
Lead Time comprises time spent in multiple stages of the order fulfillment process. In contrast, transit time is the total amount of time spent during the movement of the product from its origin to its destination.
9.3) Is Leas Time different from Cycle Time?
Cycle time is the time taken by a manufacturer to finish a product. In comparison, lead time is the time to complete the order fulfillment process, from receiving the product in the warehouse to delivering it to customers.