I can’t even begin to recall how many times I am asked, “How does lean help improve my bottom line?” To answer the question, consider the following simple example for a fictitious company, let’s call it Widget Works.
Lean improvements create production capacity without adding cost other than direct materials, and as a result the contribution margin from the added sales using the new labor and equipment capacity goes straight to the bottom line.
For a simple calculation, let’s say that before lean Widget Works has the capacity to produce products that sell for $10,000,000 with the breakdown as follows:
Labor cost of this capacity = $1,000,000
Overhead costs of this capacity = $1,000,000
Material cost = $7,000,000
Gross Profit = $1,000,000
Widget Works sales team indicates that they could double sales if the company had the capacity to produce the increase in volume. The company leaders decide to implement Lean process improvement and as a result their capacity doubled, such that the same labor, equipment, facilities and support staff can now produce and sell $20,000,000 of product. Deducting the $1,000,000 for labor and $1,000,000 for overhead, plus $14,000,000 for materials the gross profit is now $4,000,000.
Your organization may not be fortunate enough to be in a market where they can double your sales like Widget Works therefore you may want to look at Lean Process Improvement as a way to reduce costs as well as increasing value for the customer. It is an obvious but often overlooked fact that while costs can only go down to zero value can increase infinitely. There are only two parts to the Taiichi Ohno’s profit equation (Profit = price – cost), and while he teaches that the customer sets the price and that we can only lower costs in order to affect profit, we can in fact affect the price by enhancing value.
The reduction of cost is often much easier than increasing value. One of the reasons is that while waste is easy to define and agree upon, value is defined by customers and is subject to change constantly. The improvement of business processes, not just manufacturing processes, is an important part of lean that is often overlooked. This includes making marketing, sales or product development processes more effective contributors to bottom line results. The reduction in time to market, the shortening of the cycle time to complete a sale or the improvement in customer service can all be value differentiators which allow one to command a price premium.
To return to the original question, we can see that lean can impact the bottom line by increasing capacity, reducing costs or enhancing customer value to command a higher price.
Willie L. Carter is the president of Quantum Associates, Inc, a process improvement consultancy. He helps managers unlock the full promise, speed, and energy of their processes. Carter certifications include, Lean Sensei, ISO 9000 Lead Assessor, Manager of Quality/Organizational Excellence. He is an experienced facilitator, coach, and author of the book “Process Improvement for Administrative Departments, The Key to Achieving Internal Customer Satisfaction.” His company helps executives optimize their business processes to minimize their costs, accelerate their cycle time while simultaneously enabling them to do more with less. He can be reached at firstname.lastname@example.org