Vaibhav, a reader of LSS Academy, emailed us the following question.
Can you please help me understand the definitions for the following terms?
1) Cycle Time
2) Manufacturing Lead Time
3) TAKT Time
4) Inventory TurnsYour help to clear the definitions & formulas for the above is highly appreciated.
Depending on who you talk to you may hear these terms defined differently.
For example, what some people call cycle time others call production lead time, etc.
The key is to understand the concepts of the terms… that way when someone describes a term you’ll know what they mean no matter what they call it.
In any event, here’s my take on these popular terms. If you have a different twist you’d like to share give us a shout out in the comments section below.
Cycle Time
Cycle time describes how long it takes to complete a specific task from start to finish. This task may be to assemble a widget or answer a customer service phone call.
Now, you can get fancy and segregate value added cycle time from non-value added cycle time if you’d like.
Cycle time can be measured with a stop watch.
Manufacturing Lead Time
I actually prefer to call this Production Lead Time or PLT for short.
The PLT represents the total time – value added and non value added – it takes a product to make it through an entire value stream.
This is often called the “call to cash” time since it helps us understand the time between taking the order and receiving payment for the delivered goods.
Value stream maps are excellent tools for determining the Production Lead Time.
Takt Time
The word takt is German and literally means pace or rhythm. When we speak of takt time we’re attempting to understand the rate at which we need to produce our product in order to satisfy customer demand.
To calculate takt time think touchdown, or T/D, since we simply divide the net available time by the customer demand.
So, if our customer wants 240 toaster ovens and we have 480 minutes to produce these toaster ovens, our takt time is 2 minutes per toaster oven (480/240).
Takt time cannot be measured with a stop watch. It can only be calculated.
Inventory Turns
Finally, inventory turns help us understand how frequently our inventory “turns over” or is used after it’s been purchased.
There are actually a few different ways to calculate inventory turns but the most common method is to divide the Cost of Goods Sold by the Average Inventory Level.
The key is to use the cost of goods sold, or COGS, meaning what we paid for the material, not what we sold the material for.
So, for example, if we have an annual cost of goods sold of $50,000,000 and our average inventory during this same time frame is $5,000,000 our inventory turns would be 10. In other words, our average inventory “turned over” 10 times.
Now, as lean thinkers, we do need to tread carefully with this metric as our friends over at Evolving Excellence mention in this article.
As an aside, you’ll notice that Bill actually uses the term cycle time to describe what we’re calling Production Lead Time (PLT) above. But it’s all good since we know what he means.
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So, for example, if we have an annual cost of goods sold of $50,000,000 and our average inventory during this same time frame is $5,000,000 our inventory turns would be 10. In other words, our average inventory “turned over” 10 times.
Ron, Regarding this statement, it is correct to use annual cost of goods sold? What if you measured it month by month? In this case you can predict what is going on and take some action for the next month or another, but not to wait until a complete year. The final result could be obsolet parts.
Measuring month by month you could use the ideal turned over as a target or goal and compare the figures every month.
Your thought are welcomed.
Regards
So, for example, if we have an annual cost of goods sold of $50,000,000 and our average inventory during this same time frame is $5,000,000 our inventory turns would be 10. In other words, our average inventory “turned over” 10 times.
Ron, Regarding this statement, it is correct to use annual cost of goods sold? What if you measured it month by month? In this case you can predict what is going on and take some action for the next month or another, but not to wait until a complete year. The final result could be obsolet parts.
Measuring month by month you could use the ideal turned over as a target or goal and compare the figures every month.
Your thought are welcomed.
Regards
Hi Wilson, you can definitely calculate turns on a monthly basis. In fact, most companies do.
There are also a plethora of ways to get to the “average” inventory number. A lot will depend on the industry and the company’s accounting policy.
Be sure to check out the Evolving Excellence article I linked to in the article… they offer some great advice on the true value of measuring turns.
Hi there.
I read the article regarding evolving excelence and it place an excelent point of view and a very good example with the “air space dead” because of the iceland situation.
But i have to disagree with what is said and explained regarding inventory turns. Me as lean thinker, believe that we have to reduce inventory, but we cannot stop selling or shipping the product, that would be very easy, stop producing and dont care about the customer in order to obtain the turns of a world class company.
What we do in our organization “Elkay Mexico” is very simple to understand and even simplier to apply, i dont know if this is what is done in other parts of the world, but is what we do here in Mexico. We simply ask our “sales power” and sales supervisors, to give us monthly a tree months forecast of their market, with this, we create an atmosphere that give us time tu anticipate the production time and the balance of the line. If there is an extraordinary request for a client, we have the opportunity to respond well in time. In order to reenforce this three months forecast, we compare it to an ABC analysis that is manipulated by the supply chain managment of the organization. This is why, i still believe that keeping inventory is one kind of waste and should be kept on the maximun turns we can get and always trying to improve it.
Thanks.
Saludos desde Mexico
Thanks Ron for a wonderful article one again. I have a point to share about cycle times…
Another generalized definition of CT is the rate at which you are getting the output…This created some confusion in my team recently….This is how:
we went to a shop floor where a machine had 3 fixtures for 3 diff operations, and hene it processed three parts simultaneously…a piece has to go through all the three operations one by one…
In this cae, output rate is very different from CT…but since due to the generalized definition, my team mate got confused
My take was that doesnt matter how many operations are performed in the machine, but CT for the machine will be total time a piece spends in the machine (sum of CT for all the operations + waiting time when loading unloading is happening)…..which is very different from output rate….whats you take on this?