The lean profit formulaAny enterprise owner whether he is a lean manufacturer or a conventional manufacturer he is looking for profits. But when asked the question “what is the profit?” a conventional manufacturer will tell us that, the profit is the difference between cost incurred and the sold price. In the traditional manufacturing context the cost will be the manufacturing cost that is the cost of raw material and the over head costs. When the profit is added to this cost they will arrive at the final price of the product. If we put this in a mathematical formula it would look like below. Price = Cost + Profit If we go in to the details of each of the components in this formula, we will find something interesting. In today’s competitive markets there is a high probability of you are not being the only one who is producing this product. So there will be heavy competition without any doubt. Completion will be based on the quality, delivery, compliances and so on. But even today the prime competition will be on price of the product. Given all the above conditions are equal between two competitors people will go for the cheaper products. Even some of the concerns above will be tolerated for cheaper prices. So it is not easy to increase your product prices in today’s context. On the other hand no manufacturer will manufacture a product for nothing. They need profits. No manufacturer will tolerate on their profits. They want that to be positive obviously. Now we will revisit the pricing formula given above. Now we have one factor which we can not increase. That is the price of the product. On the other hand we are looking to increase the profits. So how can we keep this balance going? There is only one way to achieve this. That is to reduce the cost of manufacturing of that product. So we will rewrite the above formula as below. Profit = Price – Cost So your profit will be directly dependent on the manufacturing cost of the product. If you need higher profits you will have to reduce the cost of manufacturing. It is as simple as that. But how can a manufacturer reduce the cost of manufacturing without affecting the quality or lead time or compliance standards. This is where lean manufacturing will be handy. Lean manufacturing always talks about eliminating wastes. Wastes are defined as the activities or processes which does not add any value to the final product in lean. If you eliminate the wastes from the system, you will obviously be reducing the cost of manufacturing. Apart from that lean manufacturing will eliminate the wasted time so that the lead time will become shorter. Quality improvement is another key advantage of lean. This means if you are a lean manufacturer you will be delivering high quality products to the market with shorter lead times and with a lower price than your competitors, importantly while you are making higher profits. So conceptually this proves in today’s context lean manufacturing is the way of competing and wining the markets. |
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Lean productivity Vs batch efficiency | All not Parts of your system can become lean | The lean profit formula |
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