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
Not Cost Accounting
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.
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:
For any given investment, it is better to get back two dollars
than one dollar, all else being equal.
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
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
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
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.
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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