The Three Bucket Theory --Dickeson
We have three buckets for inventories: Raw, Wip and Fig—Raw materials, Work in process and Finished goods. Once the Fig is invoiced, it moves from finished goods to sales and is a claim for payment—an account receivable. Cash goes out of the box for raw materials; cash comes back into the box when the claim is collected. We're looking at three materials inventories and a receivable—a four-step cash-to-cash cycle.
This is a true, simple, unvarnished look at the effectiveness and efficiency of a printing business. Throughput velocity is measured by the number of days the three materials inventories and accounts receivable claims exist. It's constraint management a la Eli Goldratt. Whatever impedes the cash-to-cash flow is a constraint.
We're not talking accounting. We're talking about production cycle measurement. How long do materials hang around before you collect the money? This not only measures the liquidity, it measures conversion speed of the production process of the company. It's a global view—an ERM approach (Enterprise Resource Management). It's an acid test of management competence.
My preference is to report these measurements on a weekly basis in a rolling 13-week quarter context. Few, if any, printing companies are able to do this because they lack weekly data. The perceiver group for inventory throughput is DMOH (Days Materials On Hand.)
Calculation of DMOH is easy: divide the sum of Raw, Wip and Fig inventories by the sum of the week's materials usage. If you do it with weekly data, multiply the result by seven (days). If it's done by month, multiply by number of days in the month. Now do it separately for each of the three inventory classifications. The result is four sets of index numbers—four perceivers—to support management decisions.
You can do this on a rolling 13-week basis and accompany it with a chart and trend line. The cartoon (graphic) is always what you look at first. If DMOH is trending down, "Happy, Happy" as Chef Emeril Lagasse would say. The fewer the days, the faster the cash pops back into the box.