Cost Minimization and Lean

Firms should always choose production technologies and plans that are profit maximizing. One implication of choosing a profit maximizing production plan is that there is no way to produce the same amount of output at a lower total cost. Therefore, cost minimization is a necessary condition for profit maximization.

Lean production technologies aim at cost minimization, even although that objective may be unspoken. It is important to remember that the Toyota Production System (TPS), from which Lean thinking is derived, was Toyota’s response to achieving the same cost performance as mass producers.

The power of Lean comes from its ability to improve the marginal product of labour, therefore allowing a firm to produce more output with the same labour resource, or produce the same output with less labour resource. A Lean production technology also decreases a firm’s need for capital inputs by improving asset utilization and performance.

Good Lean practitioners should be able to demonstrate through an analytical framework how their¬†interventions will impact a firm’s cost structure. The interventions should be aligned with a firm’s strategic position for competing in the marketplace. Too often, Lean interventions are couched in technical terms and the impact upon the marginal productivity of labour is never made explicit. Unless this relationship is made explicit, the issue of cost minimization will be unresolved.

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