How Lean Management is using a new cost model to stay ahead of their competitors!
In this article, I want to take a look at the advantages of lean management and its effect on any business. There is a direct correlation between the style of management and the success of any business. Why is this? All business owners, no matter what type of field they are in are trying to make a profit. However, to understand an important business process we need to start by asking a simple question “what is profit?” A traditional business owner will say that profit is the difference between costs incurred to produce an item and the selling price to the customer. In a traditional company, the costs incurred are usually production costs, which include raw materials, labor and overhead. Profit is the amount of money added on top of the production costs to generate the selling price of a finished product. They used a traditional cost model or formula for calculating the selling price for a finished product.
Traditional Cost Model: Selling Price = Production Costs + Profit
In today’s global markets, there are very few companies that are driven by supply and demand in the traditional sense. Today, the world markets are consumer driven, which changes the dynamics of selling and setting the sales price for any item. What does this mean for the business owner? It means they must realize that, unless they are in a niche market, there are hundreds of companies competing for the same customers. Therefore, the traditional formula for calculating profit is not going to work in this business environment. Companies must use a different formula to ensure their selling prices are competitive in the global markets. However, if they set their prices too high the consumer will not purchase their products because they will be too expensive compared to other similar products. If they set their sales prices too low they will reduce their profit margins, and this will impact overall business growth. So, what does a company need to do to compete in global markets?
As we moved into the 21st century the old business cost model has changed dramatically, to one of collaboration between consumers and businesses. Product branding has become the buzz word for any items being sold in these new vibrant global markets. Countries like India and China are expanding economies that are generating huge numbers of new consumers. In the traditional cost model, higher prices were due to higher demand and a limited supply. However, today it is the opposite! The demand for products is still high but the selling prices of finished goods are determined by the consumer, not the business owner. If the consumer believes the selling price is too high they will go find another business selling the same item at a cheaper price. The internet has made the world a smaller place for the consumer in that they can purchase products from anywhere in the world. Modern companies are turning to lean management to change their way of thinking and developing a better understanding of what consumers want and how to meet their needs.
What is Lean Management?
Lean Management is using lean thinking to improve business practices by implementing lean principles to identify and eliminate waste. This has created a paradigm shift in business strategy and product development for the 21st century. The consumer driven markets also demand a new cost model for any business to stay competitive and thrive. A lean management team understands the needs of the global markets and how to establish a new level of thinking about setting the selling price of their products. There is a new lean cost model for defining the selling price of a product.
Lean Cost Model is: Profit = Selling Price – Production Costs
A lean cost model is forcing companies to review their current business practices to reduce costs and increase profits. The reason for this is because the selling price is determined by customer demand. Lean Management teams understand that they have no control over the selling price, this is determined by the consumer, and therefore, they must find ways to reduce costs. Forward thinking companies are developing lean management teams to use lean principles to improve the quality of their products, while at the same tie reducing costs. The consumer has many choices to take their business anywhere they want to. The business owner has one choice, and that is to find a way to reduce costs. Lean Management is helping them to do this more cost effecively, click hereto learn more…