Production Rates

A Lean tenet is to produce at the rate of customer demand. While this may be good in principle (it helps minimize overproduction and other wastes, while synchronizing processes), there is an implicit assumption: that the rate of customer demand represents a firm’s profit-maximizing output quantity.

A firm’s optimal output quantity is that which maximizes the firm’s profit. The current rate of customer demand may result in an output quantity that is either above or below the optimal output quantity, meaning that producing at that rate does not maximize profit.

Profit is maximized when a competitive firm produces at the output quantity where marginal revenue equals marginal cost. This is a microeconomic optimization problem, not a production rate or takt time problem. Taking a firm’s current rate of customer demand and blindly producing at that rate incurs the risk that profit is not being maximized.

Segments

Different market segments have different costs to serve. They must have, because they are different customers with different needs. Firms run into trouble when they forget this basic rule and average the costs of serving different segments together. This results in prices based on average costs which lowers profitability, since some customers are overcharged while some are undercharged.

The concept of segmentation is based on the idea that there exist different customer groups with different needs. Serving these needs requires tailored value. Since the value is tailored for each segment, pricing is not uniform across all the segments served. In fact, good segmentation requires that each segment commands its own specific price for the value being offered.

Good segmentation is a foundation for a good strategy. Choosing the right mix of segments to serve, offering tailored value, and pricing appropriately for each segment can increase earnings and erect barriers to imitation by rivals.

Product Development

Successfully bringing new ideas to market is a challenge for many firms. At the root of the problem is resource allocation. Resources can be squandered or dissipated on inferior ideas, or there may be insufficient resources to successfully execute a good idea, leading to a missed opportunity.

Several points should be made here. First, it is the responsibility of senior management to actively invest in the activities which are central to product development. Lack of investment in these activities leads to a lack of resources and capability with which to execute development activities. Secondly, ideas chosen for development need to wisely chosen. This has to do with both the quality and the quantity of ideas. Great development opportunities are not just great ideas – they are great ideas with a sufficiently compelling business rationale and model. Similarly, choosing too many ideas which outstrips a firm’s capability to execute is as bad as having no ideas in the development pipeline.

Finally, a firm should not forget that it does not have to execute all stages and steps of product development using its own resources. Collaboration with partners and licensing an idea to another firm are viable options to consider for bringing products and services to market.

Optimization

Economic thinking holds that an equilibrium state is the optimum position for a given economic unit (i.e., a firm), in which that unit is striving for attainment of that equilibrium. Because no firm has unlimited resources, it is critical for firms to identify the optimal positions for which they are striving and to allocate resources accordingly.

Economics and business strategy share much in common – both are ultimately concerned with choice. When a goal is to be chosen or selected, that is a choice to be made. So, also, is the means whereby an economic unit will seek to accomplish that goal. Goals and the means for achieving them are many and varied and it is the purpose of optimization that, given certain defined criteria, to identify the best of the alternatives available.

Among the most common choices of goals confronting firms is the need to maximize something (the firm’s revenue, its profit, its rate of growth, etc.), or to minimize something ( the firm’s costs, for example). These types of problems are what are called optimization problems, or “the quest for the best.”

Unfortunately, firms sometimes fail to identify the optimal positions towards which they are striving. In many cases, conflicts exist in which the resources of a firm work at cross-purposes to each other. For example, salespersons may be compensated and rewarded on maximizing revenue, but this may be done at the expense of profit if these same salespersons have little regard for costs.

The major purpose of strategy is to clarify direction and goals. This, in turn, surfaces constraints and makes optimization manageable. Without the clarity afforded by strategy, optimization becomes well-nigh impossible.

Improving On Time

Often, in our consulting work, we are approached by firms that want to “do Lean” and develop a culture and practice of continuous improvement within their organizations. However, once some of these firms begin to understand that Lean and continuous improvement is hard work, and that time, resources and energy must be devoted to it, they become less enthusiastic.

A key problem that every firm desiring to improve must confront, and solve, is how to make the time and resources available for continuous improvement. For firms whose operations are afflicted with broken processes which require daily workarounds, firefighting, and event-driven management, this can be a challenge.

The challenge, it seems to me, is a simple one: if an organization is to improve, it must find the time in which to confront and solve problems. If it cannot do this, the organization is destined forever to keep its legacy practices and problems, with little or no improvement or change.

Turning an organization’s workforce into an army of problem solvers requires an up-front and real commitment of time and resources. For a variety of reasons, some firms are simply unwilling to change their current practices by committing resources to problem solving and continuous improvement. These reasons may be rooted in a lack of commitment by top management or a resistance to change by middle management. In effect, such a firm finds itself caught in a vicious circle: problems and firefighting consume a lot of the organization’s resources and time, and consequently there is no time available to make improvements.

Getting out of this trap requires a serious commitment by top management. In the short-term, resources must be mobilized and marshaled to confront and solve problems. Problems should be attacked and solved on a project-by-project basis, using appropriately configured and coached teams to create and implement solutions. While attacking the “low-hanging fruit” often seems like a logical place to start, it may not be the best: choosing chronic problems which are a significant drain on resources will pay back a higher dividend in time freed up to attack other problems.

In effect, an organization pursuing this path is creating time and space for itself in which to do further problem solving and improvement. The first steps are critical – the organization must be prepared to commit resources and suffer some disruption to normal practices for progress to be possible.

Lean is about competing on time – about reducing lead times, development times, etc. Competing on time requires improving on time – finding the time to problem solve and continuously improve. If you can’t improve on time, you won’t compete on time.