19.3. Machine set up performance was also found significantly different between the two groups of firms.

The set up process includes activities such as understanding machining operations on the part, selecting the
sequence of operations, setting the speeds and feeds, preparation of fixtures and tools, loading the part, and
adjustment of location and height, which are carried out to prepare machines for manufacturing. The CNC
machine tool reduces most of these activities by means of features such as selecting speeds and feeds,
making rapid moves between surfaces to be cut, using automatic tool changing, monitoring tool wear,
conveying chips, controlling coolant, in-process gauging, and loading and unloading the part [27] thus
causing dramatic reductions in set up time.
The finding of Lagace and Bourgault [28] is also similar with our finding in that the set up program seems
to have the highest rates of improvement in the future in SMEs where CNC technology is used intensively.
McDermott et al. [4] also state that SMEs invest in CNCs to reduce set up costs and increase
responsiveness.

19.3. Performana configurrii mainii difer ntre utilizatorii i non-utilizatorii de sisteme performante
CNC . Procesul include activiti ca: nelegerea operaiilor de prelucrare pe piese, selectarea secvenei de
operaii, stabilirea vitezei i avansului, pregtirea dispozitivelor de fixare i a sculelor, ncrcarea piesei/
componentei i ajustarea poziiei i nlimii- care sunt efectuate pentru a pregti utilaje pentru producie .
Mainile-unelte de tip CNC reduc majoritate acestor activiti prin caracteristici cum ar fi:
selectarea vitezei i avansului (feed), realizarea micrilor rapide ntre suprafeele de tiat prin
funcia de schimbare automat a uneltelor , monitorizarea uzurii instrumentelor/ sculelor,
asigurarea deplasrii materialului achiat (chips), controlarea sistemului de rcire, calibrarea
continu/ n progres (in-process gauging), ncrcarea i descrcarea piesei de prelucrat, reducnd n
acelai timp, timpii de configurare.
Programul de configurare e substanial mbuntit n IMM-urile ce folosesc intens tehnologiile CNC.
Investiia n CNC-uri reduce costurile de instalare i sporete viteza de reacie .

19.6. Another significant difference between the two groups of firms concerns in-process waiting time. The
decrease in non-value added activities like set up and material handling leads to reduction in waiting time.
Similarly, tool and fixture utilization was also found to be significantly different between the two groups of
firms. The flexibility and versatility of the CNC machine tools enable it to approach the workpiece from
many angles and with various speeds and tools to accomplish a large number of manufacturing operations
without moving the workpiece to an additional fixture [29]. The ability to leave the part on the same
machine for other subsequent processes with the same or other tools and same fixtures provides an
important advantage for CNC machines by increasing the utilization of tools and fixtures.
19.6. Dpdv al timpilor de ateptare- Reducerea activitilor ce nu genereaz valoare adugat,
precum cele de Configurare i Prelucrare a Materialelor duce la reducerea timpilor de ateptare.
Utilizarea sculelor i dispozitivelor de fixare difer pentru utilizatorii i non-utilizatorii CNC. Flexibilitatea
i versatilitatea mainilor- unelte tip CNC permit prelucrarea piesei de prelucrat din diverse
unghiuri, la diferite viteze i cu multiple scule, pentru efectuarea n final a unui numr mare de
operaii de prelucrare, fr a muta piesa pe dispozitive de fixare suplimentare. Posibilitatea de a
menine piesa de prelucrat pe aceeai main pentru efectuarea de procese ulterioare, cu aceleai
unelte i dispozitive de fixare reprezint un avantaj de baz al mainilor CNC, prin eficientizarea utilizrii
de instrumente i dispozitive.

19.14. The work in process inventory need is another factor,which was found to be significantly
different between the two groups of firms. Usually, potential problems such as machine breakdown, long
set up time and quality problems in production encourage firms to hold inventory. On the other hand,
holding inventory is costly since it requires infrastructure
such as warehouses, containers, additional space, etc. [30]. CNC technology helps the solution of these
problems and contributes to the reduction of the WIP inventory. Similarly, the features of CNC technology

1
reduce the importance of batch size constraint that was also found to be significantly different between the
two groups of firms.
19.14. Necesarul de stocuri de producie n curs de execuie (WIP) difer pentru utilizatorii i non-
utilizatorii CNC. Probleme poteniale, cum ar fi defectarea mainilor, timpi de configurare prelungii
i probleme cu calitatea produciei ncurajau firmele s creeze inventar. Gestionarea stocurilor e ns
costisitoare, deoarece necesit o infrastructur de depozite, containere, spaii suplimentare. Tehnologiile
CNC soluioneaz aceast problem, contribuind la reducerea WIP i totodat reducnd importana
constrngerilor de dimensiune a loturilor de mrfuri (Batch size constraint) alt element ce difer
semnificativ ntre utilizatorii i non-utilizatorii CNC.

9.3. There is a significant difference between the users and non-users of CNC in relation to cost. This result
is also in line with the work of Das and Narasimhan [31] who fiind that CNC machines are used to reduce
cost in low volume job shop environments. Integrating several complementary machining processes in one
CNC machine tool, requiring less tool, fixture and labour, reducing scrap and rework are some of the
reasons for the increase in operational efficiency that leads to cost reduction.
9.3. Exist o diferen semnificativ ntre utilizatori i non-utilizatorii CNC, n raport cu costurile. Mainile
CNC sunt utilizate pentru reducea costurilor n medii de lucru precum ateliere secii de prelucrri
caracterizate prin producie la volum redus. Integrarea mai multe procese complementare de
prelucrare ntr-un singur echipament CNC, ce necesit mai puine instrumente, dispozitive de fixare i
munc efectiv i duc la reducerea defectelor de fabricaie, rebuturilor- determin n final creterea
eficienei operaionale i implicit, reducerea costurilor.

18. Product quality is another factor that was found to be significantly different between the two groups of
firms. Vonderembse et al. [8] and Bessant [32] state that as manufacturing systems evolve, the emphasis
that the customer places on capabilities changes, i.e. product quality becomes more important than product
cost. In traditional machines, the quality of operations is highly dependent on the operators skill and
experience. Operators and the methods in manufacturing are the major sources of variation, both of which
introduce some process irregularity.
18. Calitatea produsului difer semnificativ ntre utilizatorii i non-utilizatorii CNC. Odat cu evoluia
sistemelor de fabricaie, se schimb accentul pus de client pe capabiliti, calitatea produselor devenind mai
important dect costul produsului. La mainile tradiionale, calitatea operaiilor depinde de calificarea i
experiena operatorului . Operatorii i metodelele utilizate n fabricaie sunt principalele surse de variaie ,
ambele putnd fi i cauze ale proceselor ce prezint neregulariti.
However, in the CNC machining environment, the operators skill is replaced by the skill of computer-
based operations. Supporting our finding, Asfahal [29] claims that the elimination of these sources of
variation is possible by the use of CNC machines resulting in higher quality. In addition to this, performing
many operations in a single fixturing of a workpiece brings up greater uniformity and quality than a series
of special purpose or traditional machines that require several refixturings of the workpiece.
n mediul de prelucrare CNC, calificarea operatorului e nlocuit de capabilitile operaiilor bazate
pe calculator. Astfel, eliminarea celorlalte surse de variaie e posibil prin utilizarea mainilor CNC,
duce la o calitate mbuntit. Realizarea multiplelor operaii n aceeai poziie de fixare a piesei de
prelucrat aduce o uniformitate i calitate mbuntit, fa de lucrul pe mai multe aini tradiionale cu
destinaii/ uz diferite, ce necesit repetarea operaiilor de prindere/ fixare a piesei de prelucrat.
13.3., 13.4 . Another finding of this research is that product variety flexibility was found to be significantly
different between the two groups of firms. The firms that use CNC technology have higher variety
flexibility than the others. Variety flexibility is the ability of a machine to perform different combinations
of operations of different products economically and effectively. It permits the production of a greater
number of highly differentiated products. It enables a firm to enhance customer satisfaction by providing
the kinds of products that customers request in a timely manner [33]. Lefebvre et al. [34] state that SMEs
face an increasing demand for flexibility. These firms encounter quite volatile demands and strive to be

2
flexible enough to respond to the changing demand. According to Bessant and Hayword [35], CNC is
appropriate for such an environment.
Flexibilitatea, exprimat prin varietatea produselor, difer semnificativ ntre utilizatorii i non-utilizatorii
CNC. Firmele care folosesc tehnologie CNC au o flexibilitate prin varietate superioar, definit de
abilitatea mainii de a efectua diferite combinaii de operaii pentru realizarea diverselor produse, n mod
economic i eficient. Rezult diversificarea, prin fabricarea unui numr superior de produse extrem
de difereniate i creterea satisfaciei clienilor prin furnizarea de soluii personalizate, n timp util,
element vital pentru IMM-urile ce se confrunt cu o cerere constant pentru flexibilitate i o cerere a
pieei n sine, fluctuant/ variabil.

Because CNC machines decrease set up time, lot size, inventory level and reduce manufacturing lead time,
the factory operations become more flexible in responding to the changing market demand [30]. Similarly,
Swamidas and Kotha [12] claim that CNC machines are compatible with a jobshop process environment,
characterized by low volumes and customisation responsiveness. Handfield and Pagell [3] also support this
view and state that investments in CNC machines provide resources that enable a firm to respond to rapid
market change and adapt to shorter product life cycles by designing and producing high quality, custom
designed products.
Deoarece mainile CNC reduc timpii de configurare, dimensiunea loturilor, nivelul de stocuri i
timpul de execuie al produselor, operaiunile fabricii devin mai flexibile n aciunea de a rspunde
cererea fluctuant a pieei. Mainile CNC sunt compatibile cu un mediu de producie de tip atelier sau
Jobshop, caracterizat prin volume mici de producie i reactivitate nalt prin customizare. Investiiile n
Tehnologii Avansate de Producie ofer resurse ce permit firmei s rspund schimbrilor rapide ale
pieei i s se adapteze la cicluri de via ale produselor mai scurte, prin proiectarea i producia
produselor personalizate de nalt calitate, mbuntindu-se performana.

As industry advances, the products available to customers are becoming more individualized. There are
more special options and features to meet the particular needs of the customer. They have increasingly
started to require firms to supply a wide variety of products with good quality and at low cost. Evidently
this suggests a volatile market environment for firms where use of customization and new product
introduction capabilities would be a preferred strategy for pursuing market performance. Especially the
SMEs that work as suppliers for large scale companies seem to face increasing requirements by their
customers. Therefore, without upgrading their manufacturing capabilities none of them seem to have a
chance to be considered by their customers to work with. Therefore the findings of this research are
particularly useful to the management of the firms that are in the planning phase of CNC implementation.
They can use the information for the alignment of the requirements of their business and the capabilities of
CNC technology for a successful CNC technology adoption.
Pe msur ce industria avanseaz, produsele furnizate clienilor sunt din ce n ce mai individualizate, cu
diverse opiuni i caracteristici special configurate pe baza nevoilor difereniate, impunndu-se condiia ca
productorul s furnizeze calitate superioar, la preuri reduse. Acest lucru sugereaz un mediu de afaceri, o
pia volatil n care customizarea i sporirea capacitilor de dezvoltare a produselor noi reprezint
strategia de vital pentru atingerea performanei. n special IMM-urile ce lucreaz n calitate de furnizori
pentru companiile de dimensiuni mari se confrunt cu cerine din ce n ce mai exigente ale acestora,
neavnd vreo ans n faa concurenei, fr modernizarea capacitilor de producie proprii. Doar prin
alinierea cerinelor de afaceri cu capacitile date de tehnologiile CNC pentru o implementare cu succes a
tehnologiilor avansate de producie, productorii nregistreaz nivelul de performan i competitivitate
urmrit. (pag. 9)
http://en.wikipedia.org/wiki/Discrete_manufacturing

Discrete manufacturing is the production of distinct items, products (automobiles, furniture, toys,
smartphones, and airplanes are examples of discrete manufacturing products), both easily identifiable and
differing greatly from process manufacturing products that are undifferentiated, (oil, natural gas and salt). It

3
is often characterized by individual or separate unit production (units can be produced in low volume of
high complexity or high volumes of low complexity). Low volume/high complexity production results in
the need for an extremely flexible manufacturing system that can improve quality and time-to-market speed
while cutting costs. High volume/low complexity production puts high premiums on inventory controls,
lead times and reducing materials costs and waste. The processes deployed are not continuous in nature;
each one can be individually started or stopped and can be run at varying production rates. The final
product may be produced out of single or multiple inputs. It is different from Process manufacturing like
production of paper or petroleum refining, where the end product is obtained by a continuous process or a
set of continuous processes.
Process manufacturing is the branch associated with formulas and manufacturing recipes, that contrasts
with discrete manufacturing (concerned with bills of material and routing). In process manufacturing, once
an output is produced, it cannot be distilled back to its basic components. A car or computer, on the other
hand, can be disassembled and its components, to a large extent, returned to stock. Process manufacturing
is common in the food, beverage, chemical, pharmaceutical, consumer packaged goods, and biotechnology
industries. In process manufacturing, the relevant factors are ingredients, not parts; formulas, not bill of
materials; and bulk, not individual units. The terms also characterize distinct manufacturing approaches.
Fabricaia discret caracterizeaz producerea de elemente distincte, produse (automobile, mobilier, jucrii,
telefoane mobile, avioane), uor de identificat i care difer fa de rezultatul nedifereniat al industriilor/
fabricaiei de procesare (petrol, gaze naturale, alimente, buturi, sucuri). E caracterizata prin fabricaia
unitilor individual sau separat (fie n volume mici de complexitate ridicat sau volume mari de
complexitate redus). n prim caz, e necesar un sistem de fabricaie flexibil, ce poate mbunti calitatea i
viteza de lansare pe pia n timp ce reducere costurile. n al doilea caz, accentul se pune pe controlul
inventarului, timpilor de execuie i reducerea costurilor cu materiale i deeuri . Procesele desfurate nu
sunt de tip continuu ca n cazul industriei/ fabricaiei de procesare (un proces sau set de procese continue
pentru obinerea produsului final), putnd fi oprite i reluate, i derulndu-se la norme de producie/ nivele
de productivitate diferite. Produsul final poate fi produs dintr-un singur sau mai multe inputuri/ materiale/
materii prime.
Industria de procesare (Process Manufacturing) e ramura asociat cu formule i reete de fabricaie, spre
deosebire de fabricaia discret, bazat pe liste de materiale (Bill of Materials) i direcii, instruciuni de
prelucrare (routing). Doar un singur produs nedifereniat e obinut, neputnd fi descompus, dezasamblat n
componentele sale de baz cu scopul de deveni parte a stocurilor. n procesare, factorii relevani sunt
ingredientele, nu piesele componente/ reperele/ subansamblele; formulele, nu listele de materiale; produsele
n vrac, nu sub forma unitilor individuale. Tipologiile de industrii distincte- discret i de procesare-
determin abordri distincte de fabricaie.

http://www.tutor2u.net/business/production/labour-or-capital-intensive.htm
It is important to distinguish between capital-intensive and labour-intensive methods of production.
Capital refers to the equipment, machinery, vehicles and so on that a business uses to make its product or
service. Capital-intensive processes are those that require a relatively high level of capital investment
compared to the labour cost. These processes are more likely to be highly automated and to be used to
produce on a large scale. Capital-intensive production is more likely to be associated with flow production
(see below) but any kind of production might require expensive equipment. Capital is a long-term
investment for most businesses, and the costs of financing, maintaining and depreciating this equipment
represents a substantial overhead. In order to maximise efficiency, firms want their capital investment to be
fully utilised (see notes on capacity utilisation). In a capital-intensive process, it can be costly and time-
consuming to increase or decrease the scale of production.
Labour-intensive- Labour refers to the people required to carry out a process in a business. Labour-
intensive processes are those that require a relatively high level of labour compared to capital investment.
These processes are more likely to be used to produce individual or personalised products, or to produce on
a small scale The costs of labour are: wages and other benefits, recruitment, training and so on. Some
flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers.

4
Long-term growth depends on being able to recruit sufficient suitable staff. Labour intensive processes are
more likely to be seen in Job production and in smaller-scale enterprises.
III.1.7.1. Producia intensiv n capital - Capitalul se refer la echipamentele, utilajele, vehiculele
utilizate de o afacere n vederea realizrii produselor sau serviciilor oferite clientului. Procesele intensive n
capital sunt cele care necesit un nivel relativ ridicat de investiii de capital n comparaie cu costul forei de
munc, fiind mai susceptibile la a prezenta un grad ridicat de automatizare i la a fi folosite pentru
producia la scar mare. Producia intensiv n capital poate fi asociat cu producia n flux, dei orice tip de
producie poate avea nevoie de investiii considerabile n echipamente. Capitalul e o investiie pe termen
lung pentru majoritatea afacerilor, iar cheltuielile de finanare, mentenan i depreciere a echipamentelor
reprezint un cost operaional substanial (overhead). n scopul maximizrii eficienei, investiiile de capital
trebuie s fie utilizate la capacitate maxim. ntr-un proces intensiv n capital, variaiile seriei de producie
sunt costisitoare i consum timp.
Producia intensiv n munc- Munca se refer la fora de lucru necesar pentru efectuarea proceselor.
Procesele intensive n munc sunt cele care necesit un nivel relativ ridicat de utilizare a forei de lucru,
superior proceselor bazate pe investiii n capital. Acestea sunt mai susceptibile de a fi utilizate pentru
producia la o scar mic, de produse individuale sau personalizate. Costurile cu fora de lucru includ
salariile, beneficiile financiare suplimentare, costurile de recrutare, formare, etc. Flexibilitatea n
capacitatea de utilizare poate fi atins prin ore suplimentare de lucru, recrutarea personalului sezonier
suplimentar sau reduceri de personal. Creterea pe termen lung a ntreprinderii depinde de recrutarea unui
personal specializat, adecvat i suficient. Procesele intensive de munc sunt caracteristice produciei
individuale i n serie mic.

INVESTOPEDIA FINANCIAL KPIs

http://www.investopedia.com/articles/basics/06/assetperformance.asp
CCC cash conversion cycle
CCC cash conversion cycle or operating cycle is a key indicator of the adequacy of a company's working
capital position and measurement of a company's ability to efficiently manage two of its most important
assets - accounts receivable and inventory. Calculated in days, the CCC reflects the time required to collect
on sales and the time it takes to turn over inventory. The shorter this cycle is, the better- fast-moving
working capital is more profitable than tying up unproductive working capital in assets. It is influenced
heavily by the type of provided product/ service and industry characteristics.
Investors looking for investment quality in this area of a company's balance sheet need to track the CCC
over an extended period of time (for example, five to 10 years), and compare its performance to that of
competitors. Consistency and/or decreases in the operating cycle are positive signals. Conversely, erratic
collection times and/or an increase in inventory on hand are generally not positive investment-quality
indicators. the operating cycle is a "twin" of the cash conversion cycle. While the parts are the same -
receivables, inventory and payables - in the operating cycle, they are analyzed from the perspective of how
well the company is managing these critical operational capital assets, as opposed to their impact on cash.
Ciclul de conversie al numerarului CCC sau Ciclul Operaional = DIO + DSO DPO
DIO- Days Inventory Outstanding DIO= AVERAGE INVENTORY/ COGS per day= [(Yearly beginning+ Ending Inventory)/2]/
(COGS/ 365)
DSO - Days Sales Outstanding= AVERAGE ACCOUNTS RECEIVABLE/ Net Sales per day= [(Yearly beginning+ Ending
Inventory)/2]/ (COGS/ 365)
DPO - Days Payable Outstanding= AVERAGE ACCOUNTS RECEIVABLE/ Net Sales per day= [(Yearly beginning+ Ending
Inventory)/2]/ (COGS/ 365)

5
Ciclul de conversie al numerarului CCC sau Ciclul Operaional e un indicator-cheie al evoluiei
Capitalului Operaional (working capital), msurnd totodat capacitatea firmei de a gestiona
eficient creanele i stocurile. Calculat n zile, reflect timpul necesar pentru colectarea sumelor din
vnzri i cel necesar efecturii rotaiilor de stoc i atinge valori optime cu ct ciclul e mai scurt,
indicnd faptul c cu ct Capitalul Operaional circul mai mult, cu att e mai profitabil (dect un
Capital Operaional neproductiv, imobilizat n active). CCC depinde i de tipul de produs/ serviciu
prestat i de caracteristicile industriei.
Investitorii analizeaz valorile CCC din bilan pe o perioad extins de timp (de la 5 la 10 ani ) i i
compar performana cu cea a concurenilor. Consistena valorilor Ciclului Operaional nregistrate,
de asemenea tendinele de scdere n timp sunt semnale pozitive; n mod contrar, perioade de
colectare ce variaz puternic sau creterile n inventar nu reprezint indicatori de calitate
investiionali pozitivi
Dei Ciclul de conversie al numerarului CCC i Ciclul Operaional au aceleai componente la baz,
CO analizeaz ct de eficient sunt gestionate activele din punct de vedere operaional, n timp ce
CCC analizeaz impactul acestora asupra finanelor companiei.

http://www.investopedia.com/university/ratios/operating-performance/ratio3.asp

Operating Performance Ratios: Operating Cycle

By Investopedia A A A
Filed Under: Beginning Investor Fundamental Analysis, Fundamental Analysis, Beginning Investor
By Richard Loth (Contact | Biography)
Expressed as an indicator (days) of management performance efficiency, the operating cycle is a "twin" of
the cash conversion cycle. While the parts are the same - receivables, inventory and payables - in the
operating cycle, they are analyzed from the perspective of how well the company is managing these critical
operational capital assets, as opposed to their impact on cash.

Formula:

Components:
DIO is computed by:

1. Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;
2. Calculating the average inventory figure by adding the year's beginning (previous yearend
amount) and ending inventory figure (both are in the balance sheet) and dividing by 2 to obtain an
average amount of inventory for any given year; and
3. Dividing the average inventory figure by the cost of sales per day figure.

For Zimmer Holdings' FY 2005 (in $ millions), its DIO would be computed with these figures:

(1) cost of sales per

739.4 365 = 2.0
day
(2) average 536.0 + 583.7 =
inventory 2005 1,119.7 2 = 559.9
(3) days inventory
559.9 2.0 = 279.9
outstanding

6
DSO is computed by:

1. Dividing net sales (income statement) by 365 to get net sales per day figure;
2. Calculating the average accounts receivable figure by adding the year's beginning (previous
yearend amount) and ending accounts receivable amount (both figures are in the balance sheet)
and dividing by 2 to obtain an average amount of accounts receivable for any given year; and
3. Dividing the average accounts receivable figure by the net sales per day figure.

For Zimmer Holdings' FY 2005 (in $ millions), its DSO would be computed with these figures:

(1) net sales per day 3,286.1 365 = 9.0

(2) average accounts 524.8 + 524.2 =
receivable 1,049 2 = 524.5
(3) days sales
524.5 9.0 = 58.3
outstanding
DPO is computed by:

Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;
Calculating the average accounts payable figure by adding the year's beginning (previous yearend
amount) and ending accounts payable amount (both figures are in the balance sheet), and dividing
by 2 to get an average accounts payable amount for any given year; and
Dividing the average accounts payable figure by the cost of sales per day figure.

For Zimmer Holdings' FY 2005 (in $ millions), its DPO would be computed with these figures:

(1) cost of sales per

739.4 365 =2.0
day
(2) average accounts 131.6 + 123.6 =
payable 255.2 125.6
(3) days payable
125.6 2.0 = 63
outstanding

Computing OC
Zimmer Holdings' operating cycle (OC) for FY 2005 would be computed with these numbers (rounded):

DIO 280
DSO +58
DPO -63
OC 275

Variations:
Often the components of the operating cycle - DIO, DSO and DPO - are expressed in terms of turnover as a
times (x) factor. For example, in the case of Zimmer Holdings, its days inventory outstanding of 280 days
would be expressed as turning over 1.3x annually (365 days 280 days = 1.3 times). However, it appears
that the use of actually counting days is more literal and easier to understand.

Commentary:
As we mentioned in its definition, the operating cycle has the same makeup as the cash conversion cycle.
Management efficiency is the focus of the operating cycle, while cash flow is the focus of the cash

7
conversion cycle.
To illustrate this difference in perspective, let's use a narrow, simplistic comparison of Zimmer Holdings'
operating cycle to that of a competitive peer company, Biomet. Obviously, we would want more
background information and a longer review period, but for the sake of this discussion, we'll assume the FY
2005 numbers we have to work with are representative for both companies and their industry.

Days Sales Outstanding (DSO):

Zimmer 58 Days
Biomet 105 Days

Days Inventory Outstanding (DIO):

Zimmer 280 Days
Biomet 294 Days

Days Payable Outstanding (DPO):

Zimmer 63 Days
Biomet 145 Days

Operating Cycle:
Zimmer 275 Days
Biomet 254 Days

When it comes to collecting on its receivables, it appears from the DSO numbers, that Zimmer Holdings is
much more operationally efficient than Biomet. Common sense tells us that the longer a company has
money out there on the street (uncollected), the more risk it is taking. Is Biomet remiss in not having tighter
control of its collection of receivables? Or could it be trying to pick up market share through easier
payment terms to its customers? This would please the sales manager, but the CFO would certainly be
happier with a faster collection time.

Zimmer Holdings and Biomet have almost identical days inventory outstanding. For most companies, their
DIO periods are, typically, considerably shorter than the almost 10-month periods evidenced here. Our
assumption is that this circumstance does not imply poor inventory management but rather reflects product
line and industry characteristics. Both companies may be obliged to carry large, high-value inventories in
order to satisfy customer requirements.

Biomet has a huge advantage in the DPO category. It is stretching out its payments to suppliers way beyond
what Zimmer is able to do. The reasons for this highly beneficial circumstance (being able to use other
people's money) would be interesting to know. Questions you should be asking include: Does this indicate
that the credit reputation of Biomet is that much better than that of Zimmer? Why doesn't Zimmer enjoy
similar terms?

Shorter Is Better?
In summary, one would assume that "shorter is better" when analyzing a company's cash conversion cycle
or its operating cycle. While this is certainly true in the case of the former, it isn't necessarily true for the
latter. There are numerous variables attached to the management of receivables, inventory and payables
that require a variety of decisions as to what's best for the business.

For example, strict (short) payment terms might restrict sales. Minimal inventory levels might mean that a
company cannot fulfill orders on a timely basis, resulting in lost sales. Thus, it would appear that if a
company is experiencing solid sales growth and reasonable profits, its operating cycle components should
reflect a high degree of historical consistency.

8
Proceed to the next chapter on Cash Flow Indicator Ratios here.
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http://www.investopedia.com/terms/m/marketshare.asp
Market Share

Definition of 'Market Share

The percentage of an industry or market's total sales that is earned by a particular company over a specified
time period. Market share is calculated by taking the company's sales over the period and dividing it by
the total sales of the industry over the same period. This metric is used to give a general idea of the size
of a company to its market and its competitors.

Investors look at market share increases and decreases carefully because they can be a sign of the relative
competitiveness of the company's products or services. As the total market for a product or service grows, a
company that is maintaining its market share is growing revenues at the same rate as the total market. A
company that is growing its market share will be growing its revenues faster than its competitors.

Market share increases can allow a company to achieve greater scale in its operations and improve
profitability. Companies are always looking to expand their share of the market, in addition to trying to
grow the size of the total market by appealing to larger demographics, lowering prices, or through
advertising. This calculation is sometimes done over specific countries such as Canada market share or US
market share.

Investors can obtain market share data from various independent sources (such as trade groups and
regulatory bodies), and often from the company itself, although some industries are harder to measure with
accuracy than others.

http://www.investopedia.com/stock-analysis/2008/dell_sacrifices_profit_for_market_share_dell.aspx

Dell Sacrifices Profit For Market Share

By Eric Fox on September 02, 2008 A A A
Filed Under: Equity
Tickers in this Article: DELL, HPQ
Dell Computer (Nasdaq:DELL) reported fiscal second quarter earnings that missed analyst expectations
by 5 cents per share. This disappointed investors who were hoping that the company's turnaround under
founder Michael Dell would show progress.

Weak Margins
Dell reported revenue of $16.4 billion and earnings per share of 31 cents. Although revenue was up 11%
year over year, operating income fell 9%, and net income 17%, as the higher top line didn't translate into
higher earnings. Gross margins were 17.2% in the quarter, down sharply from the 19.9% recorded in the
same quarter last year. The margins were partially impacted by strategic pricing actions in Dell's Europe,
Middle East and Africa (EMEA) segment.

The results were in strong contrast to Hewlett-Packard (NYSE:HPQ), which reported earlier in the month.
Hewlett-Packard beat analyst expectations and raised guidance for the full year. The company's results
were helped by having only 32% of its sales in the U.S, giving it a positive currency impact due to the
weaker dollar and a tailwind from the stronger growth from non-U.S. economies. Dell has 49% of its sales
in the U.S. (For more on the impact of a rising or falling dollar, check out The Impact Of Currency

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Conversions.)

Dell did grow sales faster outside the U.S., particularly in the BRIC countries of Brazil, Russia, India and
China, where revenue was up 41% on a 46% increase in units sold. Revenue from the BRIC countries is
now 9% of Dell's total sales.

The push to grow its market share may continue to hurt earnings, as the company expects more spending on
the infrastructure to support sales and service in those areas. "We'll continue to incur costs as we realign
our business to improve competitiveness, reduce headcount in certain areas, and invest in infrastructure and
acquisitions," said CFO and Senior Vice President Brian Gladden. Gladden also gave an ominous warning
on the slowdown in corporate spending on technology: "We see continued conservatism in IT spending in
the U.S., which has extended to some extent to Western Europe and certain countries in Asia."

Analysts Aghast
During the conference call, analysts seemed particularly critical of the company strategy of price cuts to
grow share in the EMEA segment. One analyst (Richard Gardner form Citigroup) asked for more detail on
the price cuts in Europe, questioning why these particular opportunities were so strategic. CEO Michael
Dell responded by saying, "I think it's fair to say that some of the Western European economies have
slowed a bit, creating some pressure in that environment." After several follow-ups by the same analyst,
Dell admitted that the price cuts were not the result of a more competitive landscape in Europe, but were
"self-inflicted".

Another analyst questioned why Dell's revenue in EMEA grew at its slowest rate in five quarters while unit
shipments overall for the industry grew by 24%, implying that Dell might have a "fundamentally
uncompetitive [product] offering" in the market. When Michael Dell attempted to blame the discrepancy on
the company's small share in consumer versus commercial, the same analyst continued to argue the point
with Dell until finally he was cut off by investor relations. (For more on the importance of conference calls,
check out What is an earnings conference call? and Conference Call Basics.)

Bottom Line
Dell's decision to grow market share at the expense of profitability has delayed the turnaround at the
company, causing a short term earning hiccup. Investors who had hoped that return of founder Michael
Dell would be the catalyst to a more consistent growth company now have to wait another quarter to see the
results.

http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/concentration-ratio-herfindahl-
index.asp

CFA Level 1

Chapter 1 - 5
Chapter 6 - 10
Chapter 11 - 15
o 11. Corporate Finance
o 12. Securities Markets
o 13. Equity Investments
13.1 Introduction
13.2 Security Valuation
13.3 The Dividend Discount Model (DDM)
13.4 DDM and the Earnings Multiplier
13.5 Developing Input Estimates Used in the DDM
13.6 Earnings Analysis
13.7 Determining the EPS of a Company
13.8 Life Cycle Analysis: The Business Cycle
13.9 Life Cycle Analysis: The Industry Life Cycle

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 13.10 The Concentration Ratio and the Herfindahl Index
13.11 Considerations of Global Industry Competition
13.12 Analyzing a Company - Types of Stock
13.13 Technical Analysis
13.14 Using Price Multiples
o 14. Fixed Income Investments
o 15. Derivatives
Chapter 16 - 17

Equity Investments - The Concentration Ratio and the Herfindahl Index

Concentration Ratio
The concentration ratio is the measure of the percentage market share in an industry held by the largest
firms within that industry. For example, suppose 3 firms dominate a specific industry, such as beverages,
holding 80% market share of the beverage industry. The concentration ratio of the beverage industry would
thus be 80%.

Example: Concentration ratio

The beverage industry is composed of 5 firms with market shares as follows:

Co A has 30% market share

Co B has 30% market share
Co C has 20% market share
Co D has 15% market share
Co E has 5% market share.

Calculate the concentration ratio for the beverage industry.

Answer:
The three-firm concentration ratio fro the beverage industry is 80% (30% + 30% + 20%).

Herfindahl Index
Another measure of concentration in an industry can be expressed using the Herfindahl index. The
Herfindahl index is simply the sum of the squares of the market shares for each firm within the industry and
is always less than one.

Formula 13.12

Example: Calculate the Herfindahl Index

The beverage industry comprises 5 firms with market shares as follows:

Co A has 30% market share

Co B has 30% market share
Co C has 20% market share
Co D has 15% market share
Co E has 5% market share.

Calculate the Herfindahl Index for the beverage industry.

Answer:
The Hefindahl Index is calculated as follows:

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(0.30)2 + (0.30)2 + (0.20)2 + (0.15)2 + (0.05)2 = 0.245

The Herfindahl index for the beverage industry is 0.245.

The Innovation Premium is a measure of how much investors have bid up the stock price
of a company above the value of its existing business based on expectations of future
innovative results (new products, services and markets).

http://www.investopedia.com/terms/e/economiesofscale.asp

Definition of 'Economies Of Scale'

The cost advantage that arises with increased output of a product. Economies of scale arise because of
the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the
quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger
number of goods. Economies of scale may also reduce variable costs per unit because of operational
efficiencies and synergies. Economies of scale can be classified into two main types: Internal arising
from within the company; and External arising from extraneous factors such as industry size.

Investopedia explains 'Economies Of Scale'

Economies of scale is a simple concept that can be demonstrated through an example. Assume you are a
small business owner and are considering printing a marketing brochure. The printer quotes a price of
$5,000 for 500 brochures, and $10,000 for 2,500 copies. While 500 brochures will cost you $10 per
brochure, 2,500 will only cost you $4 per brochure. In this case, the printer is passing on part of the cost
advantage of printing a larger number of brochures to you. This cost advantage arises because the printer
has the same initial set-up cost regardless of whether the number of brochures printed is 500 or 2,500.
Once these costs are covered, there is only a marginal extra cost for printing each additional brochure.

Economies of scale can arise in several areas within a large enterprise. While the benefits of this
concept in areas such as production and purchasing are obvious, economies of scale can also impact areas
like finance. For example, the largest companies often have a lower cost of capital than small firms
because they can borrow at lower interest rates. As a result, economies of scale are often cited as a major
rationale when two companies announce a merger or takeover.

However, there is a finite upper limit to how large an organization can grow to achieve economies of
scale. After reaching a certain size, it becomes increasingly expensive to manage a gigantic organization
for a number of reasons, including its complexity, bureaucratic nature and operating inefficiencies. This
undesirable phenomenon is referred to as "diseconomies of scale".

http://www.investopedia.com/terms/p/production-rate.asp

Definition of 'Production Rate'

In manufacturing, the number of goods that can be produced during a given period of time. Alternatively, the
amount of time it takes to produce one unit of a good.

In construction, the rate at which workers are expected to complete a certain segment, such as a road or building.
The production rate will depend on the speed at which workers are expected to operate, generally categorized as

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 slow, average or fast.

Investopedia explains 'Production Rate'

For manufacturing and construction, a higher production rate can lead to a decrease in quality. As
machines or employees work to have more product pushed through the production line or more of a
building completed, more mistakes are likely to happen. There is thus a point at which a decrease in
quality could wind up costing a company more, even if less time is needed to push out a unit.
Five Chart Patterns you need to know

http://www.investopedia.com/terms/l/laborintensive.asp

Definition of 'Labor Intensive'

A process or industry that requires a large amount of labor to produce its goods or services. The degree of
labor intensity is typically measured in proportion to the amount of capital required to produce the
goods/services; the higher the proportion of labor costs required, the more labor intensive the business.

Investopedia explains 'Labor Intensive'

Labor intensive industries include restaurants, hotels, agriculture and mining. Advances in technology and
worker productivity have moved some industries away from labor-intensive status, but many still remain.

Labor costs are considered variable, while capital costs are considered fixed. This gives labor-intensive
industries an advantage in controlling expenses during market downturns by controlling the size of the
employee base. Disadvantages include limited economies of scale (you can't pay workers less by hiring
more of them), and susceptibility to wage forces within the labor market.

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