Thinking Demanded

A CEO hardened in the recent recessionary battles confessed to me, “I want to do this Lean stuff so I can cut my costs.” This statement always amuses me. Upon asking him what costs he expected to cut he was blunt: labour.

Here we have a great tension. We are asking people to get involved in continuous improvement, even although those improvements might result in them losing their job. In fact, in the case I just described, that is the whole rationale for doing the continuous improvements. At least the CEO was honest enough to admit it.

To a point the CEO is right – you can only reduce costs be reducing factor and input costs, and labour is one of those. However, this answer is only possible because it assumes demand is fixed. In this CEO’s world, it is the factors of production which are variable and within his control, and that he must adjust those in response to demand. If demand falls, he lays off; if it rises, he hires. In his world,  you focus on a firm’s supply side and let demand take care of itself.

Actually, firms have the ability to influence demand. They can strategize to reposition themselves in the marketplace and create valuable differences that pulls in new demand. Demand is therefore a variable that can be influenced.

Reducing costs or increasing revenue is not an either/or proposition. It is possible to do a bit of both, within reason. Working with demand asks us to think about value – how we can increase it, and make it more unique and differentiated. It also means creating that value efficiently and using resources in value chains that have been appropriately configured to create and deliver the differentiated value.

If Lean and other continuous improvement techniques are really about value, then we should be thinking about their ability to influence demand by improving value, not just cutting costs by reducing waste.

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