Does Lean Management Increase Profits?

Does Lean Management Increase Profits?

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

Does Lean Management Increase Profits?
Does Lean Management Increase Profits?

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…

3 Critical Questions About Lean Principles!

Answer these 3 critical questions before trying to implement lean principles into any type of business.

If a company can’t answer these three simple questions about how they plan to use lean principles they are doomed to failure!

The most common question I am asked is “What is the best way to implement lean principles into a business?” The answer will depend on how the business owners can define three critical factors about why they want to use lean principles :

  • Are you a willing to embrace a system of thinking that will challenge your current business model?
  • Are you willing to create a business environment that will support the implementation of lean principles?
  • Are you willing to start to see problems as opportunities for improvement rather than a necessary evil of doing business?

If you are thinking of implementing lean principles into your company and you answered “No” to any of the three questions above, stop reading this article because its not for you.

I know. You are probably surprised that I am ready to challenge you to go do something else, instead of asking you to continue to read more of this article. So, why would I be willing to do this, instead of just telling you more about lean principles?

If any business owner can’t answer “Yes” to these three key questions, their company is not ready to implement Lean Principles. The reason I am so sure that this is true is based on many years of experience working in the continuous process improvement field. To many business owners pay lip service to it, instead of doing it. Action always speaks louder than words!

Accepting change is the first step towards implementing lean principles into any business!

3 Critical Questions About Lean Principles!
3 Critical Questions about Lean Principles!

Change is a condition driven by a need, and it always starts as a thought process. The first part of the process is when someone starts thinking about change and how it will impact their environment. Next, the thinking moves into research, where the person starts to look for tools and techniques. They start to learn about the different applications and may decide to choose to understand more about lean methods. In other words, they become aware of lean principles and start to do deeper research into how they are used.

The call for change usually starts at the tactical or operational level of an organization such as on the shop floor or in an office. The person wanting to implement lean principles will often be a Team Lead, Supervisor or Line Manager, who read a book, went to a seminar or knows someone who works at a company that successfully implemented lean principles. They will start to implement their own changes to help them learn more about how lean techniques are capable of improving their workplace. Some will be successful. However, most will fail and give up. Why is this?

Adults are natural problem solvers. They desire to understand the reasons why and how things actually happen. If left to their own devices they will slowly learn and find ways to improve their environments. History demonstrates this process to be true. However, the one thing that stops this process dead in its tracks is when those in charge refuse to accept change. The same happens in a business.

Executives and managers are often focused on what they consider to be important issues involved in the day to day running of the business. However, the question here is: Are they focused on the “urgent” or the “important”? This is a very simple but significant distinction. Most are entrenched into the re-active cycle of focusing on the “urgent” issues. A few see the light and move towards the more pro-active cycle of looking at what’s “important”. Lean Manufacturing, Lean Healthcare and Lean Administration all focus employees on the lean process of identifying and eliminating waste or muda.

Bringing about change in any organization requires perseverance and discipline. Implementing lean principles needs these and more. If management does not embrace the need for change it will not happen because employees will feel disempowered by the lack of support.

About the Author:

Chris Turner is the CEO and Director of Training and Development for Radical Transformation LLC. He has 27 years of experience in the Continuous Process Improvement field. During this time, he has integrated Lean Principles, Lean Six Sigma and Change Management into his skill’s portfolio. He has worked with major organizations in the UK, USA and Canada such as the US Air Force, Canadian Ministry of Health, Siemens, Medtronic, APW, English China Clay to name a few. He participated in the design and development of Lean Certification Online, where learners have 24/7 access to online lean training materials. To learn more about lean principles click here

Are You Satisfying Your Customers?

Are You Satisfying Your Customers?

The purpose of this article is to get you to ask this question: “Are you satisfying your customer?” This seems like a pretty straightforward question. However, it is not always that easy to get a straight-forward answer. Most business owners will tell you that they are “definitely satisfying their customer needs.” How do they know for sure? Are they telling the truth? Or, are they in denial?

The follow-up question will always throw them if you dare to ask it: “Where’s your metrics to prove it.” BAM…WHAM…KAPOW! A this point in the conversation you’re either going to be shown the door, or experience an awkward silence followed by rapid change of subject. It seems perfectly normal to ask an executive management team to share their customer satisfaction feedback or their on-time delivery metrics to demonstrate their ability to fulfill their customer needs. In fact, you would think they would be extremely excited to let you see them! If they are truly satisfying their customer needs, they are consistently delivering their products or services to them on time, every time, right?

You see the problem with asking the question is that the answer you receive is not always grounded in reality; it’s often based on perception.  So, does this means they are telling lies or being dishonest? No, of course not, they are simply seeing things from a different perspective, and that is all fine and dandy. What is based on reality? How do we get to see the real picture? Well, that would be simply a matter of listening to what your customers are saying about your products and services. A business owner or management team can fool themselves, and many do but they cannot fool their customers, well not for long anyway! You see, in the 21st century, a customer has many choices and they can and will change their supplier at any time if they are unhappy with them.

So, back to the original question: can your business satisfy customer needs, or not? I have created a simple flow chart that will guide you through an easy  process to discover what and how you are dealing with the current situation in your company when it comes to customer needs. Take a look at the graphic to see the customer needs algorithm. Click here to see a larger size.

Answer the first question and then follow the path to see where it leads you. Now, you get the chance to become a character in your own version of Alice in Wonderland as you follow the white rabbit. However, try to keep a tight grip on reality as you enter and go deeper into the rabbit hole.

Are You Satisfying Your Customers?
Are You Satisfying Your Customers?

If you answer the first question honestly, it will clearly identify whether your company’s has the ability to satisfy customer needs or not, and it will tell you what action to take. On the other hand, if you’re in denial, or unaware of the reality of your current situation, it will lead you to where you believe your company is today, and it will tell you what action to take.  Enjoy your journey down the rabbit hole!

Make sure you read my next post to get the next installment about the way companies deal with this issue and try to answer the questions: Are you satisfying your customers? If you enjoyed this article please share it with your friends and colleagues by email, or the social media buttons below.

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Five Things To Know About Lean Principles!

Five Things To Know Before Implementing Lean Principles!

Every business owner needs to know this about lean principles!

Transforming any enterprise into a Lean Business can be a daunting job if the person carrying out the work doesn’t have the knowledge and experience to comprehend what needs to be done.

Allow me to share five important points about implementing lean principles! Every business owner should know about

Five Things To Know Before Implementing Lean Principles!
Five Things To Know Before Implementing Lean Principles!

these before they start implementing lean program into organization:

#1. Lean Training:

One way for a conventional company to become more profitable will be to train their employees about Lean Principles and how to apply them to eliminate waste and improve their own workspace. This can be a win-win for the enterprise, its people and its customers. Get the right individual, and that is someone who has a good knowledge of implementing Lean Principles into an enterprise. Ask for details about past results for continuous process improvement (CPI) projects utilizing Lean tools.

#2. Problem Solving:

Finding improvements on the job sounds like an easy step, nonetheless, realistically, it is rather tricky, and the root-cause of this can be that people don’t know the place to start. Most organizations get their workforce to spend their valuable time concentrating on the wrong areas. This causes more issues since it increases cost instead of reducing it. Train your staff to use lean principles to become problem solvers and then allow them to see and eliminate the waste.

#3. Kaizen:

The concept of Kaizen is based on a couple of factors included inside the word, which you will find are “Kai” and “Zen”, the definition of these two words is “change for the better.” It is important to understand that this means never changing something for the sake of change. Make it a rule to make use of change using lean principles only when it will improve business processes to increase value from a customer’s perspective.

#4. Genchi Gembutsu:

A business owner cannot determine what is happening in their workplace if they are not embracing “Genchi Gembutsu.” This is a Japanese term which loosely translates into “Go to the place where the work is actually being done to see it with your own eyes.” Don’t try to improve company methods away from the place of work, such as inside a conference area or an office. Employ lean principles to drive change! Go to where the process is currently being performed and watch it in action to get an accurate understanding about what is occurring.

#5. Developing a Lean Culture:

Many organizations employ lean principles on an unplanned basis while not thinking about the consequences of their actions in attempting to develop and establish a Lean Culture. The only way any company is not going to emerge as one more failed lean implementation statistic is to obtain the proper type of environment to aid the identification as well as elimination of waste to increase value for its end users.

Understanding these five straightforward factors will get you targeted on accomplishing the right actions and make your Lean implementation proceed much smoother. Education is important but it is only by people taking action and employing their understanding of Lean Principles that they will start to change their enterprise into a Lean Enterprise.

Chris Turner is the CEO and Director of Training and Development for Radical Transformation LLC. He has almost 30 years of hands-on experience in the Continuous Process Improvement field. During this time, he has integrated Lean Principles, Lean Six Sigma and Change Management into his skill’s portfolio. He has worked with major organizations in the UK, USA and Canada such as the US Air Force, Canadian Ministry of Health, Siemens, Medtronic, APW, English China Clay to name a few. He participated in the design and development of Lean Certification Online, which allows learners to have 24/7 access to online lean training materials. To learn more about lean principles click here

Featured image by: FreeDigitalPhotos