Lead Time
Overview
Lead time is the amount of time after an order is placed that the order will arrive.
For a company with inventory, it is the time that it takes for an order to become inventory.
Orders to replenish inventory need to account for lead time. That is, the order needs to be placed early enough for the
order to arrive prior to inventory depletion, and , the order needs to cover any customer demand that occurs during
the lead time.
Calculating Lead Time
If you
assume that product demand is constant over time, the amount of product demanded over the lead time is the demand per period (d)
times the lead time (L)
This will mean that you will need to order when you have d*L items of inventory left. During the lead time, we will have
Q items of inventory that is in-transit.
{% Average \: in \: transit \: inventory = Q L/T = Q L / (Q/D) = D \times L %}
where T is the cycle time (i.e. Q/D)
This shows that the way to reduce in-transit inventory is to reduce the lead time.
Stochastic lead Time
Stochastic Lead Time -
adds realism to modeling lead time by assuming that it is random.
