I often hear businesses state that “customers are purely price driven, they get online and find a cheaper provider”. The same businesses focus their turnaround efforts on online sales and marketing activities to drive higher sales volumes.
There is an overwhelming belief in these businesses the solution to low profitability is to sell more product at low or no profit. Seemingly they believe they will receive economies of scale. This is often simply not true.
We seem to have forgotten that;
Profit = Sales – Costs
Increasing profits is also related to the operational and decision making processes within the business. Including the management of our highest costs; property (assets), energy and people.
So how is LEAN related to this. Well LEAN is seated within the family of economics called resources theory of competitive advantage . How to get more output from the existing business resources. This is the classical definition of productivity.
It is not uncommon for LEAN to increase outputs by 30%, resulting in a doubling or tripling of profits. LEAN is a behavioural based model focussed on business level processes and people. It is more of a business philosophy, a stable of tools rather than a single tool. Not unlike Steven Coveys work with highly effective people at an individual level , it identifies what is important and what is urgent at a business level. Encouraging more of what adds value and less of what does not add value.
Simplistically, it identifies what activities generates revenue, what generates costs and what is required for compliance.
Then simply you stop doing cost generating tasks and minimise compliance tasks.Then focus on maximising the revenue and value generating activities. Because it focusses on how labour is used to maximise value, it is like time management at a business level. This is a very simplistic view of LEAN. In reality is much more than this. LEAN is a very people and process focused model.
Unfortunately, sometimes LEAN is seen as a cost reduction model that results in job losses. It is true that sometimes this is an outcome, but this depends on the motive of its introduction. I believe leaders should focus on adding growth and increased profits by generating additional capacity. Then moving the sales strategy and expectations to align with the increased production capacity. Counterintuitively this often means you have the option to lower your price while increasing your profit.
This means that the lower cost base can be used as a strategic option to enter new markets or increase market share. It is here, in this space where shareholders and consumers win.
This maybe controversial for some, but Agile principles are simular to those of LEAN but modified for the administrative environment as opposed to LEAN’s traditional home in manufacturing. In saying this both are at home in the production or service industries.
If you’re unsure about how your business can deliver the LEAN advantage, seek the assistance of an independent specialist like Woodhouse.
You can also check out our video’s on family businesses.