How to Calculate Cycle Time vs. Lead Time in Inventory Management
Businesses understand that when a customer places an order, several operations are happening in production that the buyer does not see. While customers mainly care about the delivery time, companies are juggling with cycle time, lead time, and takt time.
Tracking production rate, fulfillment time, and demand rate allow management to determine what processes need improvement to optimize the company's efficiency.
By tracking the time spent in each of the fulfillment stages, businesses can ensure customer satisfaction and determine optimal ordering quantity. In this article, we will discuss the importance of tracking these times and how to calculate each time period.
How to Calculate Takt time
Takt time refers to the production rate a company must maintain to meet customer demand. For example, if a factory consistently receives a new order every three hours, they need to complete the production in three hours or less to meet the demand. By corroborating this metric with the demand rate, businesses can eliminate any overproduction, saving capital and time.
Calculating takt time also helps-
- Accurately estimate delivery dates
- Maintain production consistency
- Increase efficiency
- Minimize overtime
- Reduce errors and increase quality
- Set attainable time targets
The takt time formula is simple-
Takt time = Total Available Production Time / Average Customer Demand
When inputting the production time value, only periods dedicated to producing the product, excluding any breaks or time devoted to maintenance or shift changes, should be included.
The time used should also be relatively short to provide accurate results. Figuring days or weeks is more reliable than attempting to calculate yearly production time. The customer demand frequency should match the time extent used to determine the production time value.
For example, if a company works a typical eight-hour, five-day week with an hour lunch, their available production time is 35 hours or 2,100 minutes per week. Let's say they consistently receive nine orders a day, resulting in 45 orders weekly. The company's takt time equals 47 minutes, meaning the production needs to complete each order in 47 minutes or less to meet customer demand.
Takt time- 47 minutes = 2,100 minutes per week / 45 weekly orders
Measuring takt time is not complicated, but it is vital to determining how long production has to fulfill orders before falling behind. If the takt value is infeasible, it is management's responsibility to determine what needs to be implemented to ensure process capability.
How to Calculate Cycle Time
While similar to takt, cycle time measures the amount of time it takes to produce one unit from beginning to end, rather than focusing on the demand rate. Tracking and comparing the production time to the number of units produced allows businesses to figure out how long it will take to complete one product cycle.
The cycle time formula is a simple division-
Cycle time = Total Available Production Time / Number of Units Produced
For example, a company that works 35 hours a week and produces seven items in that timespan has a cycle time of five hours.
Cycle time- 5 hours= 35 hours per week / 7 weekly orders
The goal for businesses is to reduce cycle times as much as possible without sacrificing the quality of goods to increase profit margins. Companies that can successfully minimize cycle times will experience benefits such as-
- Innovating production operations and meeting sooner launch dates
- Creating strong manufacturer-distributer relationships
- Increased productivity and higher production volume
- Higher customer satisfaction
- High probability from reduced labor costs and raw material stock
How to Calculate Lead Time
Lead time is the amount of time it takes a company to fulfill an order from production to final delivery. Internal factors, such as production, and external factors, such as shipping, are at play in these metrics, making it more difficult to control.
While cycle and lead times are often confused, there are significant differences-
- Are exclusively internal production processes.
- Begin and end with when a unit is produced (completion rate).
- Can be reduced by innovating production measures.
- Are only available to business management.
- Involve external operations.
- Begin once the customer places an order and ends when they receive it (arrival rate).
- Can only be slightly reduced by altering internal operations, as external operations such as third-party delivery are out of the business's control.
- Are available for both the business and consumer.
Companies can record more specific lead times as their inventory replenishment software can track transactions and shipment, reporting exactly what time the product was ordered and delivered.
Once again, the goal is to reduce the lead time as much as possible to boost customer satisfaction and loyalty, while maintaining operational efficiency. The longer the lead time, the more inventory can build up in-store, causing disorganization. Common causes of extended lead time include-
- Shipping delays
- Inventory order delays
- Excessive processes
- Mismanaged inventory
As businesses determine ways to limit takt, cycle and lead times, they can increase their bottom line through improved customer retention, reduced inventory waste, and efficient internal operations.