Most companies would agree that the formula to calculate price for your products or service is Price = Cost + Profit. I challenge you to reconsider as I think this formula only holds true for new products.
The formula companies should live by is Profit = Price – Cost. Some will be quick to point out that this is the same formula. I don’t agree, let me explain.
Price = Cost + Profit implies that you can set your price by determining the cost and some percentage of desired profit and establish the selling price. This way of thinking unfairly gives too much of the burden (and blame) to your sales and marketing team. The only long-term plan when competition comes, are margins will naturally come down unless the marketing team can continue to differentiate and protect the margin.
Profit = Price – Cost helps to focus people on establishing the right price less the cost to establish the profit. In order to increase profit, you are now more focused on eliminating waste in the value chain in order to continually reduce the cost of the product or service.
This is even more important during a slow economy.
Waste comes in many forms depending on your product or services. In Taiichi Ohno’s book, Toyota Production System, he includes the following areas for waste:
- Waste of overproduction
- Waste of time on hand (wait times)
- Waste in transportation
- Waste of processing itself
- Waste of stock on hand (inventory)
- Waste of movement
- Waste of making defective products
Software development also has the same areas of waste:
- Waste of overproduction – More functionality that is needed (complex systems)
- Waste of time on hand (wait times) – People waiting for work
- Waste in transportation – Not having resources readily available
- Waste of processing itself – Poor automated testing and bad code
- Waste of stock on hand (inventory) – backlog of design documents
- Waste of movement – Poor office layout
- Waste of making defective products – buggy software
The long-term solution to higher profit is to build good products and eliminating waste. A key to doing this is to have the entire company understand that Profit = Price – Cost and to continually look for ways to remove waste in your company.
Recommended Reading:
Toyota Production System, Beyond Large-Scale Production, by Taiichi Ohno
The Gold Mine, by Fredy Balle and Michael Balle
Additional Websites
http://www.poppendieck.com
http://www.agilealliance.org
Management, Operations
Do you have TPS Reports in your organization? You may be surprised. One of my favorite movies is Office Space. I don’t think I have ever watched this movie without someone saying that their company is just like that. TPS reports come in many shapes and sizes and can really put a block in the way of productivity.
Example, I once worked at a company that had a password on their copier/printer/scanner/fax machine. The password was added because they wanted to restrict the people who could print in color on this printer. Now I’m all for saving costs and most of the time printing black and white is a good thing. It is a green thing and we are all trying to get green.
Now you could insert the user/password into the printer properties and for the most part, a typical user could print to the machine just fine. However, there were unknown gremlins that would appear from time to time and cause that password to disappear. Thankfully, this only seemed to happen when you were running late to a meeting.
Like I said, conceptually, this was a sound idea. The company was trying to save costs by restricting printing in color. Here are some of the odd things:
- Now a user would have to enter a user/password any time they wanted to print, copy, fax, or scan.
- Thankfully, you didn’t need to remember a unique user/password as the user and password was taped to the wall above the printer for all to see and use. You just had to have the patience to push all of the little buttons to enter all of the information in order to copy, fax, or scan.
- Anyone who used the public user/password could print in color if they wanted and there was no tracking of this (in case management wanted to track it).
In Lean Manufacturing, they would call this Muda. It is something interferes with an efficient process.
Assuming the problem was to limit waste by reducing the number of color print jobs, there could have been a much better way.
- Explain to staff that the printer will do color, but please don’t do this unless it will help you become more efficient. Personally, if printing in color will make somebody more efficient, then i trust they will make the right decision. This is by far the easiest thing to do and adds to morale.
- Oddly, the printer defaulted to color printing. If a user just connected to that printer and didn’t do extra work to make it not print black and white, then they would get color. The printer should have defaulted to black and white and therefore accidents would not have happened.
I think this company probably still has the password on and this simple solution is still driving their employees nuts.
Reflecting back to the Office Space movie, this printer may have a similar end of life.
It is important to have the trust and communication in a corporate environment. We have all encountered our forms of the TPS report. Managers need to build a safe environment that allows employees to bring up these types of frustrations so they can eliminate muda and build morale.
Questions? I’ll go ahead and send you the memo again… Until then, feel free to post any comments.
Management, Operations