Lead Time Demand Calculator

The calculation itself

Lead time demand is what you will sell between placing an order and receiving it: average demand per period × lead time in periods. It is the larger half of the reorder point and the half that can be forecast rather than merely buffered.

Lead time has to be the full door-to-door figure, not the supplier's quoted production time. Manufacturing, quality check, freight, customs clearance, delivery to the warehouse and putaway are all part of the gap the stock has to cover.

Running the numbers

40 units a week over a three-week lead time gives lead time demand of 120 units.

Now build the lead time properly: 8 days production, 2 days to port, 12 days sea freight, 3 days customs, 2 days inland, 1 day goods-in. That is 28 days, four weeks, not three, and lead time demand is 160 units rather than 120.

Ordering against the quoted three weeks when the real figure is four means arriving 40 units short on every single cycle, which the safety stock absorbs until the week it does not.

What gets missed

Quoted lead times are the supplier's best case and are measured from a point they define, often from receipt of payment or from confirmation of the artwork rather than from when you placed the order.

The figure also ignores the review period. If orders are placed weekly, the average wait before an order is even raised is half a week, and that gap belongs in the calculation as surely as the freight does.

What to do next

Measure actual lead times from your own purchase order history rather than using the quoted figure. Order date to putaway date, averaged over the last ten orders, with the worst one noted separately.

Then use the measured average for lead time demand and the measured variability for safety stock. Both numbers are sitting in the purchasing records of any business that has been ordering for a year, and almost nobody extracts them.

Shortening lead time beats buffering it

Every week of lead time removed cuts both the lead time demand and the safety stock, and the second effect is the one people miss. Safety stock scales with the square root of lead time, so cutting four weeks to two removes 29% of the buffer as well as half the pipeline stock.

On the example product, moving from four weeks to two takes lead time demand from 160 to 80 and safety stock from about 39 to 28. Total stock at the reorder point falls from 199 units to 108, $1,638 of capital released from one operational change.

The routes are usually air freight for part of the order, a supplier closer to market, holding component stock rather than finished goods, or simply asking. A surprising share of quoted lead times contain a queue rather than a process, and a supplier who values the account will often shorten it for nothing more than the request.

Lead time variability matters more than average lead time for setting safety stock, and it is the input most often recorded as a single number. A supplier averaging 40 days with a range of 35 to 45 needs far less buffer than one averaging 40 days with a range of 25 to 70. Recording the actual spread over several orders is what makes the calculation useful.