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 Turns
Your help to clear the definitions & formulas for the above is highly appreciated.
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 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.
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.
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.
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