Cost Accounting (14th Edition)

Companies need to measure time to manage it properly. In this section, we focus on
two operational measures of time: customer-response time, which reveals how quickly
companies respond to customers’ demands for their products and services, and on-time
performance, which indicates how reliably they meet scheduled delivery dates. We also
show how companies measure the causes and costs of delays.
TIME AS A COMPETITIVE TOOL 681
Customer-Response Time and On-Time Performance
Customer-response time is how long it takes from the time a customer places an order
for a product or service to the time the product or service is delivered to the customer.
Fast responses to customers are of strategic importance in industries such as construction,
banking, car rental, and fast food. Some companies, such as Airbus, have to pay
penalties to compensate their customers (airline companies) for lost revenues and
profits (from being unable to operate flights) as a result of delays in delivering aircraft
to them.
Exhibit 19-7 describes the components of customer-response time. Receipt time is
how long it takes the marketing department to specify to the manufacturing department
the exact requirements in the customer’s order. Manufacturing cycle time (also
called manufacturing lead time) is how long it takes from the time an order is received
by manufacturing to the time a finished good is produced. Manufacturing cycle time
is the sum of waiting time and manufacturing time for an order. For example, an aircraft
order received by Airbus may need to wait before the equipment required to
process it becomes available. Delivery time is how long it takes to deliver a completed
order to a customer.
Some companies evaluate their response time improvement efforts using a measure
called manufacturing cycle efficiency (MCE):
Learning
Objective 4
Describe customerresponse
time
. . . time between
receipt of customer
order and product
delivery
and explain why delays
happen and their costs
. . . uncertainty about
the timing of customer
orders and limited
capacity lead to lower
revenues and higher
inventory carrying costs
MCE = (Value-added manufacturing time , Manufacturing cycle time)
As discussed in Chapter 12, value-added manufacturing activities are activities that customers
perceive as adding value or utility to a product. The time actually spent assembling
the product is value-added manufacturing time. The rest of manufacturing cycle time,
such as the time the product spends waiting for parts or for the next stage in the production
process, and being repaired, represents nonvalue-added manufacturing time.
Identifying and minimizing the sources of nonvalue-added manufacturing time increases
customer responsiveness and reduces costs.
Similar measures apply to service-sector companies. Consider a 40-minute doctor’s
office visit, of which 9 minutes is spent on administrative tasks such as filling out forms,
20 minutes is spent waiting in the reception area and examination room, and 11 minutes
is spent with a nurse or doctor. The service cycle efficiency for this visit equals 11 , 40,
or 0.275. In other words, only 27.5% of the time in the office added value to the customer.
Minimizing nonvalue-added service time in their medical delivery processes has
allowed hospitals such as Alle-Kiski Medical Center in Pennsylvania to treat more
patients in less time.
Customer
places order
for product
Order
received by
manufacturing
Machine
setup begins
for order
Order manufactured:
product becomes
finished good
Order
delivered to
customer
Exhibit 19-7
Components of
Customer-Response
Time
Waiting
Time
Manufacturing
Time
Receipt
Time
Manufacturing
Cycle Time
Customer-Response Time
Delivery
Time