What is Value-Adding?

How Do I Improve My Business Processes? (Part 3)
December 4, 2017
Lean Principles Apply to Administrative Processes Too
December 18, 2017

What is Value-Adding?

Value-added activities

The concept of what is value adding is a very important consideration when looking at the steps in a process.  When we look at streamlining a process our eventual goal is the elimination of waste- everything that does not add value in the eyes of the customers. Customer is defined as anyone receiving the product or service generated by the process. So, by that definition the customers can be internal and/or external. Take a hard look at some of the activities in your business from the customer’s perspective and determine if they add value.

Let’s question the costs of selling and advertising.  Advertising most certainly has value – but it is valuable to the company – not the customer.  Same with the cost of selling, as a customer, I could care less how many more you sell and to whom, the cost of all that is your problem.  Of course, you are concerned about selling a lot of things and racking up huge sales numbers.  As the customer, I only care about the one I bought.  The point is that because something has value for the company, does not mean it has value for the customers.

Same thing holds for logistics.  The company may need to spend money on it, but as a customer, it holds no value for me.  I really don’t care if you shipped it 7,000 miles or 100 feet.  How far it came does not influence my judgement of the value of the product.  Just because an expense is necessary for the company, it does not hold that the expense is value adding in the eyes of the customer.

You may need to spend money on regulatory compliance, but that does not make it value adding in the eyes of the customer.  There are lots of things that may be necessary (at least necessary within the business model in which you operate), but necessary and value adding are not the same thing.

The difference is that your necessary – either for your business or for compliance with regulatory agencies do not translate into higher prices because they do not make the deal any more attractive for a customer.  While I agree that many costs are necessary, and your business would be in jeopardy if it did not incur them, the acid test is on the flip side.  Will spending more on those areas reasonably result in your ability to demand higher prices – continued higher prices – not just a short-term transaction?

Will moving the plant further from the customers and increasing logistics costs enable you to raise prices to the customers?  If the answer is no then the cost is not value adding because it did not result in a better value proposition for the customer.

Same with advertising.  Sure, a slick advertising campaign can drive sales and prices, perhaps on the first sale, but the second time the customer is going to buy or not is based on the perception of value resulting from the first purchase.  In the long term, all the advertising in the world will not allow a company to command higher prices than the product is worth.  If you think this is hogwash, consider the harsh reality P&G,  (a notoriously high advertising spender) is facing with its stock “sagging like a soggy pair of pampers”, and it is the harsh reality many of the U.S. Car companies stubbornly refused to face as they were consistently outsold by Toyota, even though they outspent Toyota on advertising by almost 4:1. Advertising does not create value – just the temporary illusion of it, at best.

There are two metrics you may want to track in your business:  Value to Cost (Value adding expenses/Total expenses) and Value to Price (Gross sales/Total value adding expenses).

When you track these two metrics, you get the whole picture.  Your process improvement strategy should be driven by optimizing these two ratios simultaneously.  If you choose to convince yourself that advertising is a value adding expense you will see soon enough that, while you are making the Value to Total Cost metric look good you are degrading the Value to Price metric every time you spend more in those areas.  The two ratios provide a check on each other, which is why they should be tracked simultaneously.

The end result is that it is very important that the “what is value adding” discussion be held within your organization and that ‘value adding’ be well defined.  Value adding activities or expenses should be reduced very carefully because it is too easy to reduce customer value in the process – that is the trap too many companies that run to manufacture offshore fall into.

Non-Value Adding activities or expenses, should be slashed  with nearly surgical precision.  Perhaps, you should not be reducing overall expenses at all.  Instead maybe, just maybe you should be shifting expenses from non-value adding activities to ones that genuinely enhance the value of your product and will enable you to command higher prices.  Invest a greater percentage of the money paid for your product into the product instead of squandering it on administrative overhead, overblown advertising, global logistics and other waste.

Willie Carter began his career as a paint chemist at a Akzo Nobel subsidiary in suburban Chicago where his love for manufacturing began. Over the years his career has taken him to work with numerous SMEs to Fortune 500 companies in assisting them with optimizing their operations and administrative functions through continuous process improvement techniques. Carter is currently serving as president of Quantum Associates, Inc, which specializes in optimizing business processes to minimize costs, accelerate cycle times and improve efficiency. The company’s overarching goal is to help clients do more with less. Carter holds a BA in Chemistry as well as an MBA. He holds certifications as a Lean Sensei, Manager of Quality and Organizational Excellence and ISO 9000 Lead Assessor. He is also the author of Process Improvement for Administrative Departments: The Key to Internal Customer Satisfaction.

He can be reached at wcarter@quantumassocinc.com or by phone – 847-919-6127.

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