Vaibhav, a reader of Gemba Academy’s blog, 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.

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.

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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.

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?