SOURCE OF
ENGINEER
33
JAN 2017 FOOD FOCUSTHAILAND
Theabovestatement ispart of anarticlewrittenbyTaiichiOhno ina
book called “WorkplaceManagement”, whichhighlights the importance
of cost reduction.
For any of you who are not familiar with the name, Mr. Ohno is
among theprominent executivesof ToyotaMotorCorps, whohasbeen
honouredas thepioneerofToyota’sproductionsupplychain.Thesystem
is today famously known as “lean system”. If you ever heard of finding
the root causeby asking “5Whys”, this is themanbehind the idea.Mr.
Ohno’s last position before retirement is Executive Vice President of
themotor company.
The basic idea behind the word “lean” is the attempt to eliminate
losses in theworkprocess,and toeffectivelyuse the resources tocreate
value forcustomers.Anyprocess thatdoesnotyieldvalue forcustomers
is considered a “waste”.
Waste is considerably similar to fat that needs to be gotten rid of
or reduce, in order to be lean, effective, agile, and flexible to changing
environments.Eliminating thesewasteful fat issimilar to reducingcosts,
in order tomaintain the business competitiveness.
Mr. Ohno’s article talks about how cost reduction awareness is the
company’skey tosurvival.Using twosimpleequations,whichmayseem
identicalswitching from left to right, toexplain twodifferent ideas.Heeven
added that the first equation distorted the truth.And the equations are
1. SellingPrice=Cost +Profit
2. Profit =SellingPrice - Cost
Someof youmaybeconfusedwhetherhow the twoequationscould
bedifferent, andhowcan thefirst onemisinterpret the truth. Let’s recall
ourchildhoodmemorywhenwesolvesimplemathematicquestionsays,
producinggoodsat100baht costsandexpect for10bahtprofitonevery
sale, howmuch is thesellingprice?Well, theanswer to thisquestion is,
of course, 110 baht. But beforewemove further, let’s figure out what’s
wrongwith the first equation?
Here’s theexplanation. In reality,doesmanufacturersor thebusiness
sector reallyhave thepower toset theprice?Youmight say theanswer
is yes, if thebusiness isamonopolygameand the consumershaveno
other choiceapart fromoneparticular company.However, theworld isa
competitivearena thesedays, and if thereacloselysimilar productwith
acheaperprice,ourproductmaybeabandonedandwemusteventually
cut the price down to balance the demand and supply.
Now let’s focuson the food industry.Even though foodproductscan
beuniqueby itsdistinctive taste,attractive looksorbeautifulpackagings,
still therearemany competitors. Customers can compareour products
with those of our competitors grabbed from the same supermarket
shelves. There are, moreover, direct competitors - products that are
similar to ours, and indirect competitors - products that consumers feel
are replaceable.
Thus, the power to set the price is actually relied on “customers”
or “market” by choosing the products from any company. This makes
selling price an “external factor” which manufacturers cannot fully
control.Starting thebusinessbyonly focusingoncostandprofit,with the
expectationofawarmwelcome from themarket, is thewrongwayaround.
The second equation, however, is more consistent with the
competitive world. By changing from an ‘inside-out’ perspective to be
‘outside-in’.
The companymust evaluatehow the customers value itsproducts,
andcompare to thepossiblesellingpriceperceiveby themarket.Then,
cost target can be set to earn desire profits. However, cost target must
be broken down to available cost structure.
For example, if we evaluate our products with the view of the
customers, our product should cost around 100 baht. If we can control
the cost of production to be at 90 baht, then we can earn the profit of
10 baht. The 90 baht cost is the compulsory goal, which breaks down
into small goals of eachorgan.
Wecan lookbeyond thisandsee that “cost”and “profit”areactually
the same thing like two sides of a coin. That is because themore we
invest, the better profit we can get. And if we can decrease the cost
down from90 baht to 85 baht, we can havea bigger profit of 15 baht.
I personally think this concept is very beneficial when you need
to explain to your employee how to sustainably build a business by
focusingfirston thecustomersbeforecontrolling thecost,andcontinuous
development.
In thismanner,whatwehave learned from leanorganisation is that
wemust rationally set our selling price in accordance with customers
value. After that, we can set target costs for the existing products and
futureproducts.Thenwemust try to reducecosts through improvement
activities in order to increase bigger profits, whichwill be appropriately
distributed toemployees, executives, stockholders, customersand the
society.
“…We are always thinking about ways to cut costs. For us, costs are things
tobe lowered rather than things tobe calculated. Nomatterwhat wedo, the
singlemost important issue for us iswhether costs havebeen lowered…”
SettingTargetCost,
TheBasicConceptof
LeanSystem
