Lean truly focuses on building capacity and opportunity. In the process, there are many cost savings. As part of every business’s activities, costs are to be reduced, or more typically managed. Lean cost savings are due to the fact that instead of managing costly activities, Lean Thinkers seek to eliminate them if possible, permanently. So Lean is often characterized as a great cost reduction program. It’s all very well and good, and for the most part, it works. As Taiichi Ohno of Toyota said “Costs do not exist to be calculated. Costs exist to be reduced.”
There is, however, much more to Lean. There’s a strategic element. Here are some things to think about that may quickly show why:
- You can’t save yourself rich – Wealth depends on growing revenue, not merely spending less. 10 years saving $5,000/year by skipping your morning Latte with get you $50,000 in ten years that won’t be worth $50,000 (see below)
- Cash is worth less every day. Inflation eats away at the buying power of liquid assets. Particularly today, where short term cash investment returns less than the rate of inflation, cost savings alone is a losing strategy.
- Unsold Product is worth less than cash. An even worse strategy is sinking that cash into inventory. When you carry inventory, you have transformed precious cash into money that loses value every day, and you can’t spend it. When you do sell it, it will have depreciated in value and quality and it will take time to get paid for it. Your financial reports won’t reflect that very well, so you won’t be able to use them to focus attention on the problem. Lean will definitely help with those problems, if you let it.
- Debt costs more than cash. Let’s say you save money, but at the same time incur debt as part of a business expansion. It’s like trying to pay off $50,000 of student load debt by using the money you saved in Lattes. One is worth less than $50,000 and the other costs more. It really doesn’t work very well.
So, am I saying you shouldn’t try to reduce costs? Certainly not! Fiscal responsibility to the bottom line is absolutely vital and is part of every Lean initiative. What I am saying is that Lean’s true value is in expanding top line performance. That is where the real opportunity for revenue growth lies. When Lean is applied from the top down, it opens up competitive advantage through more intelligent and rapid innovation, cost reduction, increased performance, better customer service and relationships, better planning, and more nimble reaction to uncertain situations. Lean as a strategy let’s you do this under conditions of decreased debt load, increased cash flow, rising profit, with better problem solvers in your organization.
It’s also much easier than “sacrificing the latte” and not just because I really like latte. One of the things I’ve come to believe is that its far easier to make $10,000 than it is to save $5,000. In fact, it’s easier, better, faster, and cheaper. Again, doing without things you don’t need is a good thing, but it won’t make you rich.
Explore Lean as a Strategy in more detail in The Lean Strategy by Daniel Jones, Jacques Chaize, Michael Ballé, and Orest Fiume.