What is lead time?

Lead time is the elapsed time from the moment an order is placed, or work is requested, until the result is delivered. It sets how far ahead a business has to plan, because anything needed within that time has to be ordered on a forecast rather than in response to real demand. Longer lead times mean more stock held in reserve and more risk of being wrong.

How it works

Lead time is the sum of everything between request and delivery: waiting to be processed, production or preparation, and transport. Often the waiting is much longer than the actual work. Variation matters as much as the average, because a lead time that is sometimes 5 days and sometimes 15 days forces more safety stock than one that is always 10.

Lead time ties together other measures. The stock needed to cover demand while waiting for a delivery is demand per period multiplied by lead time, which is why reorder points depend on it. By Little's law, the work in progress in a process equals the rate of arrivals times the time each item spends in the system, so shortening lead time reduces stock held on the way.

Example

Say a bakery orders flour from a mill and the order takes 4 days to arrive. The bakery uses 50 kg a day, so during the lead time it consumes 4 x 50 = 200 kg. To avoid running out it must place the order while at least 200 kg remain. If the mill can cut delivery to 2 days, the bakery needs only 100 kg of cover, which frees 100 kg of flour from sitting in stock. The numbers are an illustration.

How to model it in Machinations

Use a Delay on the resource connection that carries goods from a supplier Source into a Pool of stock, with the delay set to the lead time. A Drain connected to the Pool represents demand. Make the delay length a Lever. Play the diagram and chart the stock Pool, and compare the lowest point of stock for a short and a long lead time.