Lead time is the time between when a business receives a customer's order and when the product is actually delivered. Lead time can be divided into two sets of activities: value-added activities and non-value added activities. The former are things that the customer actually pays for; the latter are periphery and support activities that add to the product's price without increasing its value.
In a nutshell, the higher the cost of non-value added activities, the higher the cost of the lead time, as this is time that could be spent adding value.
Write down every single process that your company undertakes from the taking of the order to the delivery of the product.
Separate value-added processes from your list. If you are a freelance writer who receives an order on Monday and delivers the work on Friday, your value-added time is the time you spent researching, writing and editing that project.
Remove everything else as a non-value added process. If the project above spent two days waiting as you did your accounts and put together a monthly marketing plan, these two days are non-value added costs. The same applies if your printer ran out of ink and you had to replace it before you could print your project. This is a non-value added cost; the client is paying for words not ink.
Add the cost of the non-value added processes. For waiting time, add up the rate you generally make per hour. If as a freelance writer you generally make $35 an hour, then two days of waiting time cost you $560 in lead time, as you could have been adding value during this time.
Calculate the average lead time cost for all your projects by repeating this process on several other projects and find an average. This is your lead time cost.
Tip
Try to reduce your lead time cost by increasing efficiency. In the example, you spent a lot of time doing accounts. If you can outsource this for less than $35 an hour it only makes sense to do so.
