Manufacturing Cycle Time 



Having small children has helped me to become reacquainted with fantasy in my life and that has helped me to understand venture capitalists. Venture capitalists (VCs) really do the world a great service by bringing investment funds to worthwhile ideas that create new businesses and new jobs for all.

Entrepreneurs often feel insulted when they hear the price VCs are willing to pay. The important thing to remember is that this process is only to put a price tag on the deal. The venture capitalist has already decided whether or not he or she wants to do the deal by talking to customers, talking to suppliers, and evaluating the market. Many entrepreneurs make the mistake of equating the pricing process with how they value the business internally.

The venture capitalist has the wildest ride of them all. Often, the VC knows little about the technical side of a business. The VC makes the decision based on the story of the enterprise and the reputation of the management. The valuation is after the fact. Remember: The VC hits only one home run for every ten investments made. Four are outright failures and the VC wishes the other five would be because they won't make anyone a fortune and they require continuous attention. The VC prices each deal with a 50% discount expecting to have at least one winner come in at a much higher rate to make up for the ones that don't finish.

The VC really has very little to go on to price a deal. After all, if it were easy, the risk wouldn't be high and a VC wouldn't be needed. Consequently, VCs have to fall back on experienced-derived rules of thumb. There are an infinite number of rules of thumb and infinite ways each is calculated. A common way is to express the value as a multiple of revenue, a multiple of earnings and/ or a multiple of book value. Book value is a fictitious number invented by accountants to confuse people. It is supposed to represent all the assets an entity has less all the liabilities an entity

owes. Table 3 demonstrates how a VC may go about valuing a deal. The real fun is when the three calculations give different answers. Then the VC has to explain away differences that are highly suspect to begin. It provides for an interesting way to wile away a winter evening.

Cycle Time Reduction and the Discounted Net Cash Flow

Earlier, we used Table 1 to show a discounted cash flow calcu­lation along with some sensitivity analysis. Let's get back to Table 1 to examine some very important but often missed points. Many implement a cycle time reduction program because of the headcount reductions but they are missing the boat. It is just as easy to assume that headcount requirements will increase as better response leads to more business. There are three real points: The first is that costs savings permeate throughout the manufacturing process in terms of more up time, less maintenance, fewer errors and better response time. The second is there is a one time large, real free up of cash that flows through the process as a bad rumor flows through an office. This is a real green dollars saving. The third one that is often not mentioned is the impact felt throughout the business. It starts with the suppliers that are getting goods closer to when you want them with fewer defects because they have a better idea what you want. It ends with the better collections because customers are getting what they want with fewer defects. There is no such thing as a discrete business process in reality. Again, all of these are real green dollar savings that can be quantified if understood.

Sometimes, a reduction in cycle time results in what appears to be greater costs but this is an illusion brought on by the peculiar­ities of cost accounting as it is currently presented. The benefits are real as are the jobs saved. Figure 1 is from an actual, typical situation.

To be Continued


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