What Is Order Lead Time? 5 Tips To Shorten Purchase Order Lead Times
Order lead times are an essential part of your warehouse management process and a big factor in what breaks or builds trust in your direct-to-consumer (DTC) brand.
Want to get on the shortlist of customers’ favorite companies? Then, you’ll have to reduce your order lead times as much as possible. But the good news is that shorter lead times also translate to fewer stockouts and increased profits for your business — and who doesn’t want more of that?
Read on to learn the basics of order lead times and how to optimize these metrics for yourself.
What is order lead time?
Order lead time (OLT), also known as purchase order lead time (POLT), is the amount of time it takes an ecommerce brand or vendor to fulfill an order from the moment it is placed until it is received by the customer or retailer respectively.
While it's a pretty simple inventory metric, order lead time has a big impact on your brand's overall fulfillment process (more on this in a bit).
4 main types of order lead times with formulas
There are 4 main types of lead times within warehouse management. These are actual order lead time, requested order lead time, quote order lead time, and confirmed order lead time.
1. Actual order lead time
Actual order lead time (A-OLT) is the time between receiving an order and fulfilling those goods. In other words, it’s exactly how much time it takes to fulfill an order from start to finish.
Calculating A-OLT is pretty straightforward. You can use the formula:
actual order lead time = [delivery date - order entry date]
Say you just placed a purchase order. Here, the delivery date is the day the order arrives at your warehouse, while the order entry date is the day the PO was originally submitted.
2. Requested order lead time
Requested order lead time (R-OLT) is the time between when you place a purchase order and the day you ask to receive it. That is to say, you can request a preferred delivery date from your vendors.
To calculate the requested order lead time, use the formula:
requested order lead time = [requested delivery date - order entry date]
The requested delivery date is the day that you want the order to arrive, while the order entry date is the day the order was originally placed.
Keep in mind that R-OLT doesn’t account for your vendor’s ability to fulfill orders within that time frame. It simply gives you an idea of how long you would ideally wait for their order to be delivered.
Sharing this information with your vendor before placing the PO to confirm they can meet the request will drastically improve your fulfillment relationships. And it can help you better meet the needs or expectations of your customer base – without needing to stockpile excess inventory.
3. Quoted order lead time
Quoted order lead time (Q-OLT) is the time between the order entry date and the delivery date promised in your contract.
Ideally, the Q-OLT is as close to your actual order lead time (if not the same) as possible.
The formula for calculating quote order lead time is:
quote order lead time = [quote date - order entry date]
The quote date is the day the supplier agreed to for delivery (as stated in the contract), while the order entry date is the day the order was originally placed.
4. Confirmed order lead time
Confirmed order lead time (C-OLT) is the length of time you’ve said you’ll fulfill orders within. The C-OLT is a date accepted by both the customer and the supplier.
To find your confirmed order lead time, you can use the formula:
confirmed order lead time = [confirmed date - order entry date]
The confirmed date describes the internal agreement between the supplier and the customer, while the order entry date is the day the order was originally placed.
Essentially, the C-OLT assesses your company’s ability to hold up its end of the bargain.
If your warehouse team can’t fulfill orders in the promised timeframe, you’ll need to investigate what’s causing these delays.
Why it is important to calculate order lead time accurately
Knowing your order lead time can greatly improve your inventory management. When you accurately calculate lead time, you can reduce stockouts, prevent delays, and even boost your brand’s reputation.
Order lead times are directly related to the flow of your inventory. But when your lead time calculations go awry, you risk encountering stockouts.
For instance, say you miscalculate your OLT and the actual lead time is much longer than anticipated. Then, you'll likely go out of stock while waiting on the next shipment to arrive.
That's why reviewing your lead times is so closely tied to reducing stockouts. With quarterly lead time reviews, you can make sure you maintain optimal inventory levels and never run into a stockout situation again.
Prevent delivery delays
By carefully calculating your order lead times, you can prevent dreaded delivery delays.
When you sign a supplier contract, both parties acknowledge the same lead time and agree to the same delivery date.
With this contract in place, you can keep a close eye on the supplier’s progress and ensure the fulfillment process is going according to plan (on time and within budget). And if shipments are not moving along as they should be, it’s probably time to give that supplier a call.
Improve customer experience
A shorter lead time will always work in your favor since customers often purchase from the brand that can deliver their order the fastest.
In fact, a reported 77% of shoppers say they’ve “abandoned a purchase due to unsatisfactory shipping options.”
For example, say that Company X and Company Y sell similar products. Only X has a lead time of 5 days, and Y offers next-day delivery. There’s a good chance most people will go with Y. (Of course, this is assuming the prices and product quality are comparable for X and Y.)
Simply put, speedy deliveries improve the customer experience by providing shoppers with what they want in the time frame they want it. So, when you get your purchase orders on time, you can ensure you fulfill customers’ orders on time too.
Boost brand reputation
There’s no doubt the retail landscape is as crowded as it is competitive — which is why your DTC brand should be on the lookout for ways to set itself apart.
Order lead times present an opportunity to do exactly that. With the help of OLT calculations, you can adjust your lead times to stay competitive and attract more customers.
For one, faster fulfillment boosts your brand’s reputation. But it also translates to greater satisfaction (and retention) among your growing customer base.
Because accurate lead times speed up delivery, this helps you better meet your customers' needs. And when you can fulfill orders quickly and correctly, shoppers are more likely to trust your business with their next purchase (and the one after that).
This kind of loyalty will undoubtedly increase your profits — especially when customers tell their friends and family about your company's exceptional service. Not to mention that when customers place multiple orders with your brand, they also increase their lifetime value (LTV), driving up your profits even further.
Which factors influence order lead time?
Like many inventory metrics, order lead time can change in response to several factors. The most common include seasonality, human errors, and supply chain disruptions.
Customer demand & seasonality
Customer demand has a tendency to peak from October to December when people do the majority of their holiday shopping. This influx in sales is called "seasonality," and it represents the fluctuations in demand that are dependent on a specific time of year.
Last year, Shopify sales grew 23% during the holidays (totaling $6.3B globally). And as of right now, this trend is showing no signs of slowing down in 2022.
So, as you can imagine, seasonality has a pretty big influence on order lead time — especially on the customer fulfillment side of your operations. The more orders you receive, the more challenging it becomes to guarantee fast delivery.
Human errors & miscalculations
Manual operations calculations are prone to errors and inaccuracies — which ultimately impact your order lead times.
When your company relies on manual processes (like static spreadsheets), it can cause miscalculations with delivery times since your sales and operational data are always slightly outdated.
That’s why automation is such a key ingredient to your shipping success. Ops optimization tools like Cogsy automate many core fulfillment tracking functions by providing real-time data and sending replenish alerts that wildly improve order lead time accuracy.
Extraordinary disruptions in supply chain
It's tough to describe all the supply chain disruptions over the last few years. There's been a lack of raw materials, breakdowns in transportation, natural disasters, and even geopolitical unrest to contend with. In 2022, lead times are roughly 3x longer than usual — approaching around 6 months on average in some sectors.
And yet, some companies have found a way to thrive despite a volatile supply chain and unreliable lead times. Caraway, a DTC cookware brand, has optimized its inventory practices and reduced its OLT amid a really challenging time in retail.
Plus, by ditching their outdated spreadsheets and adopting a new inventory infrastructure, Caraway was able to pivot to a backorder model. This ensures their revenue keeps flowing (even when they're sold out and order lead times are longer than usual).
5 tips to reduce order lead times
Let’s face it: Customers aren’t fond of waiting on their orders to arrive. To generate high levels of customer satisfaction, you need quick and accurate fulfillment on every order.
The following are the 5 best ways to reduce order lead times and keep your customers happy.
1. Place smaller orders with increased frequency
While there are times when a large order quantity can save you money (thanks to bulk discounts), bigger purchases have their drawbacks, too. For instance, when large orders contribute to longer lead times, they may not be saving you anything after all.
A great alternative is to place smaller production orders more frequently.
One strategy is to bring your production plans to your suppliers and commit to ordering a big percentage of those orders from them. In exchange, ask for smaller runs or have your supplier hold on to a portion of the inventory (so you're not the one collecting holding costs).
With more frequent purchase orders, your company can enjoy shortened lead times and greater efficiency — since smaller orders take less time to process and fulfill.
2. Consider switching to a local supplier
If you're working with an offshore supplier, consider switching to a local supplier instead. Although some international vendors offer lower shipping rates, you'll need to weigh that benefit against longer delivery windows and recurrent delays.
By partnering with a domestic supplier, you can automatically reduce your lead times by several weeks (compared to shipping from a foreign country).
If you decide to move forward with switching suppliers, don't ditch your current supplier until you're positive you've secured the next one. Also, be sure you have enough inventory to carry you through the changeover in case of supply delays during the transition.
3. Reduce inefficient internal processes
Whether you're a new DTC seller or a veteran ecommerce brand, nearly everyone can improve their internal processes, at least to some extent.
When you look at what's working with your inventory management versus where you're experiencing bottlenecks, you can reduce these inefficiencies in a big way.
For example, say you're only sharing demand forecasts among your own team. It might be time that you offer that information to your suppliers, as well.
Communicating your forecasts (how much inventory you'll need and when) can help shorten lead times and manage purchase costs. Especially since suppliers can proactively prepare for your inventory needs and requested order lead time when they know it's coming.
4. Evaluate your current shipping methods
The number of shipping methods available to retailers can almost make your head spin. There's flat rate, priority, first-class, 3-day, 2-day, next day, and more. Not to mention road, rail, ocean, and air transportation options.
Evaluating your current shipping methods will require some time and critical thinking. But if you find a faster or more cost-effective option for delivery, it'll definitely be worth the extra effort.
While air is faster than sea, you might also discover that it's a lot more costly. So, if air freight destroys your margins, it might not be worth shedding that extra few days off your lead time after all.
5. Use ecommerce operations software
Ecommerce operations software is an amazing resource for overseeing your inventory levels and making proactive business decisions. With it, you can stay organized and maintain inventory control by closely tracking product movement and delivery progress.
On top of that, operations platforms can automatically trigger replenishment and real-time data to support accurate forecasts and greater supply chain visibility. This way, you can anticipate lead time disruptions and make moves to limit their impact.
How Cogsy automates your purchase order processes
If you’re like most DTC brands, you’re always looking for ways to streamline and simplify your retail operations.
With Cogsy, not only can you optimize your inventory management, but you can improve your forecasting practices to help cut back on order lead times.
Optimized inventory management
Optimized inventory management is synonymous with smooth workflows and significant cost savings. That’s because inventory optimization helps you meet demand without overspending on replenishment or storage.
With Cogsy, you can optimize your inventory via automatic replenish alerts. These alerts tell you exactly when it’s time to reorder and what quantity you need. And with this information, you can reduce your total lead times by taking the guesswork out of ordering.
Improved demand planning
While manual spreadsheets have a time and place, these tools can't offer nearly the same insights as real-time inventory data.
As we mentioned earlier, Caraway was able to part ways with spreadsheets in favor of a fresh approach to inventory management. But what we didn't say was that Caraway teamed up with Cogsy to make it all happen.
Using Cogy's operations platform, Caraway makes aggressive operational plans that actually meet its revenue goals and communicate with customers when they should expect their shipment.
And because the brand keeps unlocking faster growth amid today's supply chain disruptions, they've experienced a few unpredictable stockouts along the way. With Cogsy, Caraway set realistic expectations for delivery — even when selling on backorder — removing the uncertainty that might keep customers from completing the purchase.
That's because the Cogsy platform stores all your real-time and historical data in one place. So, you get the clarity needed to improve your own operational plans. And with better plans, the shorter (and more reliable) your lead times will be.
Simplified purchase orders
Another one of Cogsy’s signature features is its simplified purchase order process. With a single click, Cogsy creates a unique PO to meet your specific inventory needs. In other words, Cogsy does all the heavy lifting for you.
When you partner with Cogsy, you’ll feel confident you’re ordering the optimal order quantity at exactly the right time. You’ll also have a better grip on your order lead times since Cogsy relies on real-time data rather than gut feelings to track when you should place replenishments.
If you’re ready to automate your purchase orders and streamline your inventory workflows, Cogsy has you covered. Give it a try by requesting a free demo from the Cogsy team today.
Order lead time FAQs
Understanding order lead time can get a little tricky. Luckily, our FAQ section can help!
What is the difference between order cycle time and lead time?
Order lead time is the amount of time it takes to fulfill orders. More specifically, it's the time (in days) from when an order is placed until it's ready for delivery. Order cycle time is housed within lead time and describes the time it takes to process and ship out an order, excluding shipping time.
Why should you keep your inventory times short?
You should keep inventory times short because this allows you to replenish stock faster (so you don't miss out on sales opportunities). In addition, a shorter lead time will give you a competitive edge with ecommerce customers who value speed and convenience.
Do lead times affect supply chain management costs?
Longer lead times affect your supply chain by limiting its ability to respond to fluctuations in demand. This inflexibility can increase supply chain management costs since there's less room to adapt when things inevitably change.