Posted by: knightbird | February 14, 2016

More Sales or Lean Improvements

The benefits of Lean are proven. You can capture considerable value (Value Capture) from your existing revenue. By focusing on G&A, Cost of Goods Sold and Profit there is a lean way to capture considerable value. Instead, most companies focus on increasing revenue. I generally ask why. If you produce a quality product at the least cost, revenue will increase. But if you focus on just increasing revenue, the results are generally mediocre.

I looked at past results from an Alaska corporation. With $400 million in revenue, net revenue was 3.5%. So annual profit was about $14 million. If the same company increases revenue by $100 million, that’s another $3.5 million in profit. That’s not necessarily bad because it’s better than a loss. But it’s still only $17.5 million in revenue.

Let’s look at an alternative approach—creating a lean culture. Let’’s target a rather modest level of Value Capture and say that we can do the same $400 million worth of work we did for $386 million for 3.5% less. Without any additional revenue, you have increased your profit by $14 million., or $10.5 million greater profitability than a strategic initiative to capture $100 million in more revenue. Is it feasible? Absolutely. Some lean implementations reduce costs by as much as 55%.

So which path would you choose? A profit increase of $3.5 million or $14 million. Well, you actually don’t have to worry about it. The right choice is to choose the latter strategy and it’s almost a certainty that you will also achieve the former. That’s right. Your quality and cost advantage will attract more business, and you should end up with $35 million of profit instead of $17.5 million. Shouldn’t be a tough decision, but it always is.

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