# How to Calculate Lead Time

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Understanding the lead time required for your business to produce a product or prepare for a service is key to providing accurate completion dates to your customers. A frequent complaint of customers among all business lines is failure to complete the product or service by the date provided. Without a clear understanding of the lead time required to produce a product or service, you run the risk of bad word of mouth from unsatisfied customers.

Make a list of all the products required for the potential job. A product list may include items needed for a service repair or installation or raw materials used to produce the product being sold.

Determine the necessary amount of time to acquire each of the items on the list created in Step 1. For example, if you order raw material that is shipped from another state, then the time between placing the order and receiving the raw material may be five days. Allow for weekends in your calculation if your supplier does not have a seven-day work week.

Select the item with the longest lead time determined in Step 2 and jot down the amount of lead time required to acquire that item. If you maintain inventory of the raw material or products needed for the potential sale, then assume a lead time of one day to retrieve the inventory and put the item into production.

Determine the number of days/hours required to manufacture the product or complete the service. For example, it might take your business three days to manufacture a glass vase after receiving the products needed to manufacture the product. Make sure you account for weekends and current backups or delays your business is experiencing. For example, if you have a broken machine that is necessary for this job, then you need to adjust the manufacturing time to account for the repair. If you are providing a service, but you will not have an employee available for three days, then include that time in the lead time.

Add the lead time for receiving the products needed for the sale to the lead time needed to manufacture the product or free-up a person for installation. The total of the two items is an estimated lead time for the potential job.

#### Tips

• If you are losing business due to slow lead times, use the analysis to determine where you can make changes. For example, if you do not maintain an inventory, consider stocking high-use items to save lead time. If your employee lead time is too high, consider hiring additional staff in order to begin jobs sooner.

#### References

• Principles of Accounting; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991