It should be the length the tool (which includes the shank) extends from the holder, taking in to account the minimum clearances on the shank and holder.
Given a specific tool, and shank and/or holder, the system calculates the tool length required to maintain the clearances in the operation. The flute length is not used - it is the length of the tool - both neck and flute (gray and yellow).
I am not sure exactly what you are asking, but I think this example of a tool with a shank but no holder will show the basic workflow.
OOTB, the clearances are set to allow the tool neck above the flute length to touch, and provide .1000 clearance for the shank and the holder:
I generate with collision checking on, and as expected, the path stops when the shank gets to the clearance distance from the part:
To use report shortest tool, (or tool axis tilt, or tool path divide) I generate with collision checking off, to get the full path:
Then I ask for the shortest tool, and the system tells me .658:
I edit the tool length to .658, and see that the clearance to the shank is at least .1: