What is Value Added?

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July 26, 2019

What is Value Added?

Value-added activities

Value-added

The concept of what is value added is an important one. Lean is all about the elimination of waste and that waste can be defined as everything that does not add value in the eyes of the customers.

A contentious issue in most companies I’ve work with is 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.  You, as the manufacturer, are worried about selling a lot of things and racking up big 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 1,000 miles or 100 feet.  How far it came does not influence my evaluation of the value of the product.  Just because an expense is necessary for the company, it does not hold that the expense is value added in the eyes of the customer.

A company may need to spend money on regulatory compliance, but that does not make it value added 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 added are not the same thing.

The difference is that your necessary – either for business model or for compliance with the law – expenses do not translate into higher prices because they do not make the deal any more attractive for a customer.  While many costs are necessary, and the business would be in trouble if it did not incur them, the real test is on the flip side.  Will spending more on those areas logically result in the ability to command higher prices – sustained higher prices – not just a short-term blip?

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 once – but the second time the customer is going to buy or not 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.  Advertising does not create value – just the temporary illusion of it, at best.

The lean strategy should be driven by optimizing value-added expenses.  If you choose to convince yourself that advertising is a value adding expense – or decide to call all payroll value added to avoid offending anyone, you will see soon enough that, you are diminishing the value to price ratio every time you spend more in those areas.

Non-value-added expenses, should be cut with near reckless abandon.  For that matter, in many companies, they should not be reducing overall expenses at all.  Instead they should be shifting expenses from non-value adding activities to ones that genuinely enhance the value of the product and will enable them to command higher prices.  Stop squandering your money on administrative nonsense, overblown advertising, global logistics and other waste.

The bottom line is that it is very important that the discussion be held within every company and that “value added” be well defined.  Value added expenses should be reduced very, very carefully because it is too easy to diminish customer value in the process.

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.  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 wcarter@quantumassocinc.com

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