"Lead time is defined as the amount of time the lapses from the point
that an order is placed until it arrives. In the production planning
context, interpret the lead time is the time required to produce the
item." However, in its broadest meaning, lead time includes the time
to procure any materials from suppliers needed in order to produce the
"Production and Operations Analysis" by Stephen Nahmias, Irwin (1989) page 136
Lead times play an important role in firm's ability to satisfy their
customers. The longer the lead time, the longer the customer has to
wait to receive their order unless the firm elects to carry an
inventory of finished goods. However, holding inventory is not free.
Capital is tied up, and if the wrong item is produced, the production
may be wasted or may have to be marked down in order to be sold.
However, particularly when lead times fluctuate and are difficult to
predict, there is often little alternative.
Since lead time reduction can lower a firm's overall costs and make it
more responsive to the marketplace by decreasing the amount of
finished goods inventory required, reducing lead times has motivated
many firms to adopt Flexible Manufacturing Systems (FMS). Such
systems can perform many production steps at the same time, thereby
eliminating "substantial transportation time between work centers and
substantial queuing time at work centers. Since an FMS reduces
transportation, set up, and change over time, it results in
significant reduction in lead time for production."
"Production and Operations Analysis" by Stephen Nahmias, Irwin (1989) page 616
Lead time is formally incorporated into inventory planning through the
Economic Order Quantity model. Many versions of this model exist with
varying degrees of sophistication. The least sophisticated version
incorporating leadtime assumes that lead times are always constant,
but more complex versions exist that incorporate leadtime variability.
Both the average leadtime and its variability influence the amount of
inventory required. The more variability, the more inventory is
needed to protect against times when the leadtime becomes longer.
A comprehensive definition of leadtime can be found here: "Leadtime"
Glossary of Manufacturing
This article describes the importance of minimizing leadtime in a
manufacturing operation: "Assessing your current operation - Competing
Ideas" by Wayne S. Chaneski, Modern Machine Shop (Feb, 2004)