Simple Economics and Lean Production

Over the years, I’ve come to adopt a basic operating practice: the economics of a firm first, and improvement tools and methods second. I’ve done this for several reasons. First, because I want to avoid falling into the trap of using tools and methods without knowing if they are appropriate or suitable. And, secondly, because I want to have a framework for analysis which allows me to think through a firm’s situation and problems, and which will give me some way to predict the impact of my interventions on a firm’s costs, revenues, and profits.

Without knowing about Lean, if one has a good foundation in microeconomics, one can logically arrive at Lean-type thinking. Profit maximization implies cost minimization, so when working to improve a firm’s profits, one needs to think about getting behind the firm’s supply curve to start working on making its production technology more efficient and effective. This naturally leads on to looking at the sources of variable costs in the short run, and how to improve the marginal product of labour. From here, we can then get into the sources of inefficiency and begin attacking those systematically – things like defective production, setup and changeover times, machine availability, inventories, etc.

What I try to avoid in all of this is using “Lean” as a hammer with which to attack every type of problem within a firm. We really do need to get beyond the current mania and fixation on “labels” and begin thinking more fundamentally and coherently about business problems. For me, placing things in a microeconomic context works, and gives me a framework for analysis without trapping me within the confines of a toollbox or label.

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