Manufacturing Cycle Time 



At the shop floor level, it's easy to lose sight of how an operation appears at the macro level. People get caught up in the day to day measurements of head count and inventory reduction while for­getting the real objective of any organization—to maximize and accelerate cash flow. The effects of cycle time reduction eventu­ally show up in the financial analysis. Outsiders and senior management usually have no specific knowledge of an operation and consequently, fall back on indirect means of determining efficiency. They are using these means to facilitate drawing their conclusions. It can only help to understand the basis for their conclusion. We will examine how cycle time reduction flows through to the financial analysis.

Not Cost Accounting

This is not to be confused with cost accounting. Cost accounting, which is well understood and applied, is a powerful tool. Unfor­tunately, this is not my area of expertise. I have never understood some of the underlying assumptions of cost accounting. For good reasons, cost accounting concepts are changing even as you read this article. I have the easier job of focusing on financial analysis.

Basic Financial Principles

Accordingly, I am taking the easy way out. I can understand cash flow and I can determine whether an enterprise is doing well at the macro level. I can do this by applying the Grand Unifying Field Equation of the universe—cash flow is everything. There are certain inviolable principles involved that should have come down from the mount with Moses if they didn't. These are:

1. For any given investment, it is better to get back two dollars than one dollar, all else being equal.

2. It is better to get back a dollar next year than a dollar ten years from now. In fact, a dollar next year may be worth more than two dollars ten years from now. This is known as the time value of money.

3. Riskier investments require a higher projected return. The projected return for developing a new wonder drug has to be much higher than the projected return for a new but well-understood product line in order to compensate for the drug research projects that fail.

4. If there is capacity to invest in only one of two projects, alessor percentage return is justified if a greater investment is made with a magnitude that overcomes the lesser return.Now we have mastered upper division financial theory. Every results-oriented business activity is subject to these principles whether it's concerned with slaughtering sows or saving souls.

The Goal of an Organization

This brings us to the real goal of any organization. I have had manufacturing types tell me that the goal of any organization is to maximize quality while minimizing costs. Some would have it that all we need to do is shrink the product line to reduce set up operations and maximize through put. Unfortunately, this can turn into a never ending retreat as fewer profit opportunities are pursued to support the same relatively fixed infrastructure.

I've had marketing types tell me we need to expand the product line to unimaginable levels to be ready to provide the customer what ever is wanted, when wanted. While this is the spirit we want and really is a good attitude to have, out of control it can lead to inventory buildups and obsolescence. Besides, we all know all marketing forecasts are accurate.

The true goal of any organization is to maximize and accelerate cash flow. With apologies to my professional brethren, please note I did not say maximize profits. Any goal other than maximiz­ing and accelerating cash flow is a short-sighted illusion. This is one reason why cycle time reduction is so important. Cycle time reduction is just financial principles applied to manufacturing.

To be Continued


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