Overview

As explained in the preceding chapter, the operating cycle measures the time that transpires while converting inventories and receivables to cash. For the company in question, this metric is important for a variety of reasons. As a manufacturer, NikoTech must constantly source raw materials and convert them to finished goods. With 350 suppliers feeding plants on four continents, the management of cumulative lead times from the issuance of purchase orders through production and on to finished goods distribution is vital. From a receivables perspective, the days that are consumed during the invoicing and collection process are of equal importance. When taken as an aggregate measure and combined with the aforementioned income statement metrics, the performance of these activities addresses the importance of managing current assets in a productive, timely and profitable fashion. Table 12.1 considers the performance of NikoTech's operating cycle for Y1 and Y2.

The operating cycles for both Y1 and Y2 are graphically represented in Figures 12.1 and 12.2. Beginning with Y1, the first question that comes to mind is whether or not it is necessary to consume the better part of nine months...