Using Lean and Cost Reduction to Counter Rising Materials Costs
On this blog, we often talk about the Lean concept that a company is not entitled to arbitrarily tack on a desired profit margin to their incurred costs (the equation of Price = Cost + Profit). Doing this violates rules of economics that say prices are set by the market (unless you have a monopoly or collusion, then prices CAN be set by the producer).
The Lean approach is to take market prices and then engineer or reduce your costs to the point where the targeted profit level is reached. The problem is that it's hard to find examples of companies doing this. It's far easier to find examples of companies whining and complaining about increased materials costs (such as for corn or fuel), trying to pass them along to customers (or complaining that the market isn't accepting those desired price increases). Ain't capitalism a bitch?
Well, anyway, here's the example we've been looking for: EZ-GO, a maker of golf carts. Incidentally, I drive past their facility in Hurst TX on my way to the train station (yes we have trains in Texas). Their President is Kevin Holleran, and he says:
“What we face as headwind from the commodities standpoint is really unprecedented in the market that we participate in,” Mr. Holleran said. “You feel it at the pump; we feel it in the form of lead and copper.
“Like any organization, we have inefficiencies in everything we do — how we design, build and promote. That makes it even more critical for us to understand how we can improve our own internal processes to identify cost savings.”
OK, unfortunately that first paragraph is full of jargon. What he means is that lead and copper prices lead to higher commodity prices for their business. But the second paragraph nails it — they can find way to reduce costs in other areas to make up for the rising commodity costs. If commodity costs go down, then look how far ahead they are now!
Not surprisingly, they are using Lean:
With more than 1,000 employees under his command, Mr. Holleran continues to promote the company's established Six Sigma and “lean manufacturing” principles, which are focused on making products faster and less expensively while still maintaining quality.
I'm glad they even managed to mention that Lean isn't just about speed and cost — it's also about quality.
They've even illustrated how safety and Lean go hand in hand:
Workers use electric power tools that measure torque and angle for increased precision, and assembly lines are ergonomically friendly so the product can be adjusted to a worker's height. Parts are also scanned to eliminate product defects, and E-Z-GO has even increased its lighting from 30 to 120 foot-candles to assist workers' visibility.
Sounds pretty good, don't you think?