The term Lean Thinking was coined by James Womack and Daniel Jones in their book by the same name, which captures the magic of the Toyota Production System (TPS). It became a new way of thinking. The focus is to create a lean enterprise, which sustains growth through aligning customer satisfaction with employee satisfaction. A process which offers innovative products or services profitably while minimizing unnecessary over-costs to customers, suppliers and the environment. The basic thought of the concept of lean thinking is that if you train every person to identify wasted time and effort in their own job, they then work together to improve processes by eliminating waste. The end result is an enterprise that delivers more value at less expense, while developing every employee’s confidence, competence and ability to work well with others.

Lean Thinking Principles

There are five guiding principles of lean thinking:

1. Value – Understand the value the customer places upon their products and services. The value determines how much money the customer is willing to pay for the product or services.
2. Value streams – Is the entire flow of a product’s life cycle, from the origin of the raw materials through to the customer’s final cost of the product.
3. Flow – One of the most significant keys to elimination of waste. If the chain stops moving forward, not matter what the reason, waste will be created. It is an organized and synchronized process.
4. Pull – Do not make anything until the customer orders it. It requires great flexibility and very short cycle times of design, production, and delivery of the products and services.
5. Perfection – The relentless pursuit of perfection is key attitude of an organization that is going to go lean and practice lean thinking.

The aim of lean thinking is to develop each person’s autonomy in problem solving by supporting them in their continuous improvement. It is taught to managers so that they help their direct reports to think lean and reduce waste by working more closely with their teams and across functional boundaries. At the senior level, lean thinking creates leaner enterprises because sales increase through customer satisfaction with higher quality products or services.

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How do you measure the value of innovation? That is a tough question! Asking the definition of value’ becomes a loaded question. It doesn’t matter where scientific discoveries and breakthrough technologies originate”for national prosperity, the important thing is who commercializes them. Innovation involves the development of new products or processes and the know-how that begets them. New products can take the form of high-level building blocks or raw materials.

Measuring the Value of Innovation

Creating value from innovation is a crucial step for your organization. Value, actual or perceived, creates buy-in. If they believe, they will follow! Of course, when launching an innovation initiative, a tangible value will not be realized right away. It takes time, focus and perseverance. Start out with measures that go beyond efficiency gains. It takes vision to strike a spark. Innovation is a fire that burns deep in the heart of an organization. Measurement is crucial to the process. Measure every step of progress. Compare quarter to quarter and benchmark against accepted performance standards. Over time, as you grow in the initiative, results will go from being perceived to tangible. Tangible results will inspire and fan the flame of innovation. The energy created during this innovation process will inspire more creativity and innovation.

Building Value With Innovation

Your innovation project is gaining momentum. You are seeing tangible, measurable results which are producing true value. As momentum builds, always screen and evaluate innovation initiatives. Find, fund and launch initiatives that align squarely with the values and mission of your organization. Give them time to build, strengthen and gain traction. Finding ways to grow and build your business is solely based on innovation. The hidden result will be that the culture of the organization will change. Encourage the idea of intrapreneurship in building and changing an organization. This will create a forward momentum in the organization that is hard to beat. Gain a competitive edge through innovation and creativity.

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Innovation. What is the value? That is a tough question! Asking the definition of value’ becomes a loaded question. Depending on who you ask¦depends on the question you will get. It is elusive!

The True Value of Innovation

Creating value from innovation is a crucial step for your organization. Value, actual or perceived, creates buy-in. If they believe, they will follow! Of course, when launching an initiative, a tangible value will not be realized right way. It takes time, focus and perseverance. Start out with measures that go beyond efficiency gains. It takes vision to strike a spark. It is a fire that burns deep in the heart of an organization. Measurement is crucial to the process. Measure every step of progress. Compare quarter to quarter and benchmark against accepted performance standards. Over time, as you grow in the initiative, results will go from being perceived to tangible. Tangible results will inspire and fan the flame of innovation. The energy created during this innovation process will inspire more creativity.

Reaping the Benefits

Your project is gaining momentum. You are seeing tangible, measurable results which are producing true value. As momentum builds, always screen and evaluate your initiatives. Find, fund and launch initiatives that align squarely with the values and mission of your organization. Give them time to build, strengthen and gain traction. Finding ways to grow and build your business is solely based on innovation. The hidden result will be that the culture of the organization will change. Encourage the idea of intrapreneurship in building and changing an organization. This will create a forward momentum in the organization that is hard to beat. Gain a competitive edge through innovation and creativity. Never stop moving forward!

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The cornerstone of any organization is based on efficiency and  value to the customer. A lean thinking organization  uses five simple principles to ensure it understands the true value of the customer and the processes are finely tuned to reduce any process that creates waste. By ingraining lean thinking into the culture of the organization, the customer enjoys the highest quality of product or service.

Take a few minutes to better understand the five principles of lean.

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A lean thinking organization understands customer value and focuses all its processes to continuously increase it. The ultimate goal is to provide absolute value to the customer. It encourages the practice of continuous improvement and is based on the fundamental idea of respect for people.

This is accomplished through the perfection of a creation process that has zero waste and absolute value to the customer. To accomplish this, lean thinking changes the focus of management from optimizing separate assets and departments to optimizing the flow of products and services through every process. Eliminating waste along entire value streams creates processes that need less human effort, less space, less capital, and less time to make products and services at far less costs and with much fewer defects. Organizations are able to respond to changing customer needs with high variety, quality, low cost, and with fast throughput times.

There are five principles that are considered the key elements for improving efficiencies in process:

Value Defined – Comes from a deep understanding of customer needs. This determines what price a customer will pay for the goods or services.  

Value Stream Mapped – By using customer value as a reference point, you can then identify all the activities that contribute. Any action that doesn’t contribute is considered waste.

Flow Created – Taking all actions to ensure that the flow of the processes run smoothly without interruptions or delays.

Pull Established – A pull-based system allows for Just-in-time (JIT) delivery where products or services are created at the time that they are needed and in just the quantities needed.

Perfection Pursued – This step is the most crucial of the entire process. Lean thinking and continuous process improvement must be ingrained in the organizational culture. Every person should be focused on perfection while delivering products or services which are solely based on the customer needs.

The five lean principles are the cornerstone of an efficient and effective organization.  Lean thinking pushes organizations to discover inefficiencies and deliver absolute value to the customer.

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John Shook is widely recognized as a lean expert. He learned about Lean management while working for Toyota for nearly 11 years in Japan and the U.S., helping it transfer production, engineering, and management systems from Japan to NUMMI and subsequently to other operations around the world. While at Toyota’s headquarters, he became the company’s first American manager in Japan.

Take some time and check out this informative video.

https://www.youtube.com/watch?v=v8bNBtqfmrM

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Calculate Your Customer Profitability Score

To calculate your customer profitability score, simply subtract the cost of supporting a customer from the revenues they generate for you. CPS is a highly useful decision-making tool, one that is pivotal when customer-company value exchanges are in flux. The company-customer relationship is often volatile, fluctuating in response to new information. Customers don’t always value the same things, with changing needs affecting profitability. Monitoring your value stream with Six Sigma provides insight into how you can manage changes to CPS. Moreover, it can also shed light on the value of new business versus the cost of lost business. Using Six Sigma techniques like root cause analysis, affinity diagrams, DMAIC, and hypothesis testing, you can do the following:

• Select customers to target that would benefit the company.
• Separate customers to retain from customers to drop.
• Decide which customers to cross-sell, plus what products to sell to them.
• Set prices for products and services.
• Set sales compensation rates and reward program entitlements.
• Recognize customer behaviors that generate or destroy value.

Multiple types of value determine customer profitability. If you are to make the most of CPS, we recommend getting to know each one.

Historical Value

Historical value derives from long-term company-customer relationships. It is most useful when ranking your customers regarding value, plus when selecting targeted marketing groups. Similarly, historical value also impacts on your assessment of pricing and budgeting.

Current Value

Current value comes from short periods of time, usually the current or previous month, as this coincides with reporting cycles. It tends to be highly volatile, as cyclical relationship factors don’t always register within such specific time frames. The benefit of current value is that it underscores the effects of changes in the customer relationship compared to previous values.

Present Value

Present value looks to the future, specifically at revenue and cost streams of current customer business. It projects future revenues and costs, helping to model the impact of price and service decisions before you implement them. Using it effectively requires patience, but the payoff is worth the effort.

Lifetime Value

Lifetime value also focuses on the future, while acknowledging projected revenue and cost streams from existing business and prospective customers. Implementing lifetime value requires insight into your customers’ repurchase behavior. Similarly, it also entails the likelihood of the customer increasing or reducing their future business with you. Lifetime value is the optimal customer value measurement and is appropriate for just about any decision-making situation. If you can use it effectively, you can maximize profit and increase customer exposure.

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How Six Sigma Can Help Improve Projects for Greater EVA

Six Sigma is, of course, a methodology for process improvement. By focusing on and eliminating variation, you can streamline processes to improve quality. This subsequent increase in quality also has a trickle-down or domino effect throughout the rest of the business. But remember, it’s always best to improve a range of areas and not just a single process. Then you’ll be more likely to see the benefit of Six Sigma. When working on process or quality improvement projects, you can use Six Sigma techniques like DMAIC and root cause analysis to solve problems. You will find yourself reducing variation and increasing productivity, to name a few benefits.

These positive outcomes will make your company a more bankable investment opportunity for potential shareholders, and increase current shareholders’ confidence in you. Therefore, using Six Sigma, it’s possible to create greater Economic Value Added for your company. This will improve your standing for shareholders and increase the intrinsic value of your company.

Calculating Economic Value Added

Economic Value Added is a strong measure of the surplus value generated via investment. Stern Stewart & Company created the formula as a way of compiling yearly performance rankings for publicly-owned corporations. But EVA can also be used for private businesses to glean a greater understanding of the inherent worth of their company compared to others. It’s also surprisingly simple to calculate.

First, we look at the present value of all the free cash you expect to flow into the company in the future. If your capital is $100 million per year, including any debts or shareholders’ equity, EVA allows you to calculate the usage costs. You may use capital for various activities, such as paying interest, the cost of which, at $100 million, would be $10 million per year. With this figure in mind, you can increase economic value for your business’s shareholders. This only applies, however, when your projects bring in $10 million plus per year.

To calculate Economic Value Added, you must use the following equation:

EVA = OPBT – T – (TCE X WACC).

Key:

• OPBT (Operation Profit Before Tax)
• T (Tax)
• TCE (Total Capital Employed)
• WACC (Weighted Average Cost of Capital)

We find that EVA is highly beneficial as it makes it clear when your company is doing well, plus when it isn’t. Large businesses especially can become so caught up in generating profit, that they neglect the associated costs.

Applying Economic Valued Added with Six Sigma

Both EVA and Six Sigma rely on strong data to be able to function. Using Six Sigma tools, you can create an ideal work environment that generates profit through streamlined and variation-free processes. This will hold you in good stead when it comes to creating greater EVA. You can apply EVA to several business areas, including target-setting, managerial bonus allocation, investor communication, and acquisition/merger valuation. You can even use Six Sigma to eliminate operating expense, which will help to further improve EVA.

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