Cycle time and velocity
The time to respond to a customer order is referred to as responsiveness. Cycle time and velocity are two operational measures of responsiveness. Cycle time is the length of time it takes to produce a unit of output from the time materials are received ( Starting point of cycle) until the good is delivered to finished goods inventory (Finishing point of the cycle0.Another definition of cycle time is dock-to-dock time. Dock-to dock time is the numbers of days between the times materials are received at the receiving dock and the time the finished goods is shipped from the shipping dock. In a lean firm, there is no finished goods inventory-goods are shipped when finished. Thus, cycle time is the time required to produce a product (time/units produced). Velocity is the number of units of output that can be produced in a given period of time (Units produce/time)
Incentives can be used to encourage operational managers to reduce manufacturing cycle time or to increase velocity, thus improving delivery performance. A natural way to accomplish this objective is to tie product costs to cycle time and reward operational managers for reducing product costs. For example, in a lean firm, cell conversion costs can be assigned to products on the basis of the time that it takes a product to move through the cell. Using the theoretical productive time available for a period (in minutes), a value added cost per minute can be computed.
Value-added cost per minute = Cell conversion costs/Minute available
To obtain the conversion cost per unit, this value – added cost per minute is multiplied by the actual cycle time used to produce the units during the period. By comparing the unit cost computed using the actual cycle time with the unit cost possible using the theoretical or optimal cycle time, a manager can assess the potential for improvement .Note that the more time it takes a product to move through the cell, greater the unit product cost. With incentives to reduce product cost, this approach to product costing encourages operational managers and cell workers to find ways to decrease cycle time or increase velocity.