Non Value Cost and Cash Flow
Sudesh Bhikha, Entrepreneur, United States
Non-value added steps like transportation and storage of work in process (WIP) have serious cash flow impacts
, because they increase cycle time
and also they decrease quality
For example, if a product takes two days of manufacturing time, but the cycle time is 10 days, you will get approx. 3 turns of product per month. If you reduce the non value days by 5 days to 5 days, your product turnover is now 6 times per month.
The 5 non-value days that were removed were tying up 15 days of cash per month. Additionally, if there is a quality issue, you can detect it 50% faster by going from 10 days to 5 days cycle time.
The other factor to consider is that storage space also costs money because it has expenses associated
with it, like depreciation, utilities etc.
By removing non value-added steps you can get increased production from less space, improving your bottom line in the P&L.
The same logic applies to non-production processes like back office processes.