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Toyota System perspective
By Greg | March 20, 2009
Toyota Production System
The Toyota System inspires people to examine things from the right angle. Looking at the same issue from two different perspectives may lead to clashing conclusions. For example: compare these two equations:
Cost + Profit = Price
Price – Cost = Profit
The two equations are mathematically identical. However, the thinking behind each of them is completely different.
Cost + Profit = Price
traditional equation
The equation: Cost + Profit = Price is used by conventional businesses. The management regularly sits down and plans what the profits should be in the upcoming period. They then add the costs which, obviously, is a given, right? (after all, who controls the costs? Not us – our suppliers do). Costs plus profit equals price. Now they know how much they need to charge the customer for their product or service. What if the competitor has better prices? Well, they will just add a gadget or two thus increasing the value of the product.
Taiichi Ohno – the Toyota System’s co-creator rebelled against this traditional way of doing business. For him it was obvious that the market or the invisible hand sets prices – not the manufacturer (unless the manufacturer wants to lose money in which case either overpricing or under pricing will do the trick). This should be obvious to us too. After all, didn’t we learn in the beginning of our economics courses about the law of supply and demand? The customer decides how much he is willing to pay for the product. The founders and leaders of the Soviet Union tried to ignore this principle and for decades their governments set the prices of almost every commodity. As we know, that didn’t work out too well.
The Lean Philosophy goes against looking at business from the Price = Cost + Profit point of view for at least two reasons:
- Price is a given. We as manufacturers don’t have any control over it. It is the sacred privilege of the customer to set the price.
- Manufacturers do have control over the costs! Eliminating muda, or waste, lowers the costs. Backing away from the mass production system and thus decreasing inventory as well as getting rid of all other kinds of muda lowers the costs.
The Toyota System prefers this way of looking at the price/cost/profit correlation:
Price – Cost = Profit
lean equation
Here is what we call Lean Thinking:
- We ask the customer what he wants and how much he is willing to pay for it.
- We eliminate muda and thus lower the costs of creating the product and doing business in general.
- We then subtract this cost from the price (handed to us by the invisible hand) and what is left is our profit.
After we lean ourselves, to some extent we can even become resistant to recession or even an economic crisis. If we were not lean and our customers stopped buying as much as they used to ,the only way to reduce costs is laying off workers or going bankrupt.
But if our costs are already low, all we have to do is give up some profits and keep the workforce until economy improves. The Toyota System makes businesses more independent and recession resistant.
Topics: Lean Concepts | 2 Comments »
January 4th, 2010 at 11:08 pm
You Exaggerate.
August 27th, 2010 at 5:10 am
Yes, I also use generalizations just to simplify the concept. 8o)