The time lag between the placement of an order for raw materials and their actual receipt is called ______.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → lead time
Option (1) production cycle — Incorrect. Production cycle is the time span between the receipt of raw material and their conversion into finished goods. It starts only after the material has arrived.
Option (2) lead time — Correct. Lead time is the gap between placing an order and actually receiving the materials. The longer the lead time, the more material a firm must keep in store. So a longer lead time means more working capital.
Option (3) business cycle — Incorrect. Business cycle means the phases of boom and depression in business. It is about the level of trade over a period. In a boom, sales and production rise and more working capital is needed; in a depression, less.
Option (4) credit availed — Incorrect. Credit availed is the credit a firm gets from its suppliers on its purchases. It is about when the firm pays its suppliers. The more credit it gets, the lower its working capital requirement.
NCERT (2026-27 Edition): “9. Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may be required. In addition, the time lag between the placement of order and the actual receipt of the materials (also called lead time) is also relevant. Larger the lead time, larger the quantity of material to be stored and larger shall be the amount of working capital required.” “5. Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.” |