Lead Time Formula: How to Calculate Replenishment Lead Time

While you negotiate a new framework agreement for bolts, your supplier's sales rep tells you: "Delivery time: two days. Guaranteed." So you plan with two days. The bolts arrive at goods receipt on time, and still they are missing from your stock for two days and your colleagues are annoyed. Why is that? Let me explain.

What is part of the replenishment lead time?

The replenishment lead time includes:

1. Approval and ordering: from the moment the need is noticed until the order has left for the supplier.
2. Supplier lead time: from the order until the goods arrive at your door.
3. Goods receipt and putting away: accept, check and book the goods, move them onto the shelf.

Only when all three stages are done can you take the goods off the shelf, and that is when your lead time ends.

How do you calculate lead time?

You add the three stages:

Assembly needs 24 boxes in these 4 days (6 × 4). If the company only calculates with the supplier's 2 days, it plans for 12 boxes and runs out of bolts two days earlier than its reorder point assumes.

How do you find your replenishment lead time from delivery notes and order emails?

Every order email carries a timestamp, and every delivery note carries a date. Together they give you both ends of each order. If you run an ERP, a WMS or another system for your purchasing, both dates are in the purchase order and in the goods receipt posting.

1. Pick an item and a supplier. Start with the item you run out of most often and the supplier you order it from.
2. Find the last 8 to 10 orders. For each order, note the order date and the receipt date (goods booked and on the shelf).
3. Count working days. Weekends and public holidays do not count. In Excel, NETWORKDAYS(order_date, receipt_date, holidays) helps; the function counts the first and the last day, so subtract 1.
4. Calculate the average and the maximum. The average shows you the normal case, the maximum the worst case. Leave out outliers with a known one-off reason, such as a supplier's company holiday or a goods receipt nobody booked.
5. Estimate the approval. It comes before the order email and is therefore in no order. Estimate it as a separate value (1 day in the example) and add it to the average and the maximum.

In the following example, we use eight orders:

The sum is 24 days; divided by 8 orders, that is an average of 3.0 days and a longest value of 5 days. Your data does not contain the day for approval, so you add it: the replenishment lead time is 4.0 days on average and 6 days in the longest case.

Do you calculate with the average or with the worst case?

With the longest value. The average sounds reasonable, but every delivery above the average lets the stock run dry. And stockouts are the worst case.

The difference between average and maximum (12 boxes here) is the price of safety. Tied-up stock costs money, but an assembly line waiting for bolts costs more. That does not mean we recommend building up overstock.

Which time counts with partial deliveries and several suppliers?

With a partial delivery, the clock stops on the day the quantity you can keep working with is on the shelf.

If the first part lasts until the second is on the shelf, its receipt date is your receipt date. If it does not, the day the second part closes the gap counts.

Back to the example: of 60 ordered boxes, 30 are on the shelf after 3 working days and 30 after 7. At 6 boxes a day, the first 30 last 5 days, and the second part is on the shelf 4 days later, before the first 30 run out. The first delivery counts, so the measured value for this order is 3 days.

The values apply per supplier, and when you switch, you measure again. If you have two suppliers for the same item, plan with the values of the one you actually order from. If you switch depending on the situation, take the slower supplier's longest value: the shorter one only applies as long as the fast supplier can deliver.

What do you do when you have no orders to measure yet?

With a new supplier or item, start with an estimate: the lead time the supplier quotes (ask whether it applies to in-stock items), plus your approval, plus goods receipt, plus a buffer for the longest value you have not measured yet. If you buy similar items from the same supplier, take their measured values as the estimate.

With the values from the example and a one-day buffer, you start at 5 days. The measurement later gives 6, so the buffer was too small. Therefore, record order and receipt dates from the very first order. Once there are enough orders to measure, the longest measured value replaces the estimate, buffer included.

When does your measured replenishment lead time stop being right?

A customer I supported as a Customer Success Manager often struggled with shortages of threaded bolts. He had a framework agreement with the supplier for a fixed quantity that the supplier kept in stock for him.

Then, by chance, several assembly carts in production ran empty at almost the same time. The shortfall could not be fully covered from his own stock.

Now he needed a fast delivery. Unfortunately, the call-off was higher than the remaining quantity the supplier held in stock for him. The supplier was blameless, and the customer had to improvise: he bought threaded rods and had them cut to length in-house.

So the replenishment lead time was only short up to the secured quantity. The customer then signed a new framework agreement with a higher volume, so that the supplier holds a larger quantity from which he tops up his small stock. For every framework agreement, check:

1. What happens when call-offs all arrive at once?
2. Is there an emergency plan?
3. Is there a secondary supplier?
4. What is the consequence if the part is missing?

What is the difference between replenishment lead time and supplier lead time?

The supplier lead time is over once the delivery arrives at your door. The replenishment lead time ends on your shelf.

The German Gabler Wirtschaftslexikon defines lead time broadly: from placing the order until the goods are available to the recipient, including order transmission and the check at goods receipt. The procurement time adds further times there, such as the interval between two stock checks. Whether that works in practice is for you to decide.

How is the replenishment lead time related to the reorder point?

The reorder point has to cover the consumption during the replenishment lead time. If you calculate with the longest value, the delay is already included: 6 boxes × 6 days = 36 boxes. If you only place the order below this quantity, the stock no longer lasts until delivery: a stockout.

You may only plan the delay once. Either you calculate with the average (4 days, 24 boxes) and put the 12 boxes for the delay into the safety stock. Or you calculate with the longest value (36 boxes), and the minimum stock only absorbs extra consumption. Using both buffers covers the same delay twice.

How do you shorten the replenishment lead time?

Three levers:

• Approval: Define the amount up to which the warehouse or production may order without approval from purchasing.
• Supplier lead time: Ask the supplier for the order cut-off for next-day delivery. If you order at 2:05 pm although the warehouse stops picking at 2:00 pm, you lose a day.
• Goods receipt: Book and shelve the goods on the day they arrive, so that they do not sit in goods receipt.

Especially for C-parts, software-supported procurement pays off: some systems, for example, reorder automatically when the reorder point is reached. Approval by purchasing is no longer needed, which shortens the lead time and saves purchasing working time.

Calculate your replenishment lead time in a table

Take the last 8 orders of your most important item, enter the order date and receipt date in a table, count the working days and add your approval. Enter the longest value in the reorder point calculator as the delivery time.