Maintaining a high level of customer service is primarily dependent on when you reorder a product. For example, let’s say you sell two pieces of a product per day, and the item has a seven-day lead time. That is, it takes seven days to receive a product once it has been ordered from your supplier. To avoid a stockout, a replenishment order should be issued when there are no less than 14 pieces available in your warehouse. If you thought the lead time would be 14 days, but in fact, the vendor took 20 days to deliver the product, it is very likely that you would have experienced a stockout. Accurate lead times are essential to reordering products at the right time.
Many systems maintain “average lead times” by calculating a mean average of the lead times associated with recent stock receipts from the primary source of supply. For example, if the lead times associated with the last three stock receipts were 14 days, 16 days and 12 days, the average lead time would be 14 days [(14 + 16 + 12) ÷ 3 = 14 days].
Average lead times work well if an item experiences fairly consistent lead times. However, this method fails when there is an abrupt change in lead times. Consider the following three lead times associated with stock recent receipts for an item:
|Stock Received||Lead Time|
|May 7||42 days|
|April 1||14 days|
|Feb 15||16 days|
The average lead time for the item is 24 days [(42 + 14 + 16) ÷ 3 = 24 days. But 24 days probably is not an accurate lead time for the item. If the 42 day lead time associated with the most recent stock receipt was due to a temporary cause (lost shipment, temporary material shortage, short-term labor situation, etc.) the next shipment will probably take about 15 days to arrive. A lead time of 24 days is far too long. However, if the 42 day lead time represents the new “normal” replenishment time, a 24 day lead time is far too short.
Best practice is to bring unusually long or short lead times, associated with the most recent stock receipt, to the attention of the buyer. For example, we usually notify a buyer if the most recent stock receipt is either:
- More than 50% greater or less than the existing anticipated lead time
- Arrives more than a week after the scheduled