By November 9, 2006 3 Comments Read More →

GM Thinks Its Entitled to Price Increases – WRONG

Materials costs force GM to raise prices

Yet another example of a non-lean mindset company thinking they are entitled to price increases because costs went up.

General Motors Corp. has raised prices an average of 0.5 percent on about one-third of its models because of rising raw materials costs, a company official said Wednesday.

The increases were effective Monday and are driven largely by steel prices, which have gone up globally by 13 percent since January, McDonald said.

From a different article (Reuters):

General Motors Corp. said on Wednesday that it has raised prices on about one-third of its 2007 model-year vehicles in the United States to cover increased costs for steel and other commodities.

The price increases range from $60 to $425 per vehicle, GM spokesman John McDonald said, adding that the increase averages to about 0.5 percent per vehicle.

“What we are trying to do is to recover a portion of our increased costs — things like steel, materials and other commodities that go into our products,” he said.

This is such a dead horse topic on the blog, but again, the Lean/Toyota mindset says that prices are set by the MARKET. Prices have nothing to do with your costs: labor costs, commodity costs, etc. If GM is arbitrarily raising prices and the market doesn’t value their cars accordingly, sales will drop, or GM will end up having to offer more incentives to get prices back down. But, if the market is really allowing GM to raise prices, why should GM have to use the “excuse” that raw material prices went up? Because that’s “politically correct?”

In the mass production mindset, the equation was seen as:

Price = Cost + Profit

Where “Price” was set by the company based off of their Costs plus a desired Profit (10%, for example). If Cost went up, to maintain Profit, you had to increase Price. That only works if you have an monopoly.

With the Toyota/Lean mindset, the equation is more realistic:

Profit = Price – Cost

Where Price is set by the market and your Profit is based on how low you can get your Costs. Nobody is entitled to a given Profit or Price. If commodities or raw material costs go up, you have to find a way to get other costs down — kaizen and continuous improvement are great tools for that. Here’s an example.

GM still doesn’t get it. But, neither does Boeing. More examples here. Either these companies don’t get it, or again, it’s somehow palatable to customers as an excuse… everybody does it.

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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3 Comments on "GM Thinks Its Entitled to Price Increases – WRONG"

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  1. Anonymous says:

    Why doesn’t GM just increase prices to balance their high labor costs, high healthcare costs, etc?

    Because it doesn’t work! You can’t raise prices to offset costs. Thanks for preaching that, Mark.

  2. JWDT says:

    What is funny or sad is this is exactly what happens in Healthcare!

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