…then I want you to show me explicitly how you are going to improve your firm’s profitability with Lean. No, I don’t mean by telling me about all the great tools and techniques of Lean – I want to know how you will change your firm’s supply and/or demand curves in a way that improves profitability.
This is a deep question that goes right to the heart of the economics of a firm. If we are going to change some aspects of a firm’s business system, we need a microeconomic framework for analysis that allows us to predict what the impact on profit will be. If we can’t do this, we are only playing games and guessing.
Why is profit important? Simply because profit is what sustains a firm, and firms are profit-maximizing entities.
Lean should impact on a firm’s production function, inputs and costs – the stuff that determines the firm’s supply curve. It may also impact the firm’s demand curve. A good microeconomic framework allows us to analyze these changes and predict how profit is likely to be impacted. Not only that, the framework allows us to assess progress along the way and determine what changes might need to be made in the implementation.
Too much Lean is implemented without being grounded in a microeconomic framework. It becomes a technical exercise and people are seduced by the attractiveness of the tools and techniques. Let’s not forget that the tools and techniques serve a purpose and that their application should positively impact and help sustain a firm’s bottom line. So, what’s your microeconomic framework for analysis when it comes to applying Lean?