Process Management: Lean Production Model & Theory of Constraints

Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology and is holds certifications as a CIA, CISA, CFSA, and CPA, CA.

A company's ability to generate profit depends largely on its ability to manage its costs. In this lesson, you'll learn how the lean production model and theory of constraints can increase profit.

Increasing Profit

Most companies exist to provide a product or service to customers and make a profit. The basic formula for calculating profit is selling price minus costs. A company can only charge its customers the selling price that customers will pay and if it's too high, it'll drive customers to the competition. Many companies focus on controlling costs to increase profits.

Mr. Pane owns the Wow Window Company. His company is profitable but he'd like to examine his existing processes to identify areas of potential cost savings. Let's examine two ways of looking at processes to ensure Mr. Pane's company is generating the most profit it can.

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  • 0:00 Increasing Profits
  • 0:43 Lean Production Model
  • 3:31 Theory of Constraints
  • 5:57 Lesson Summary
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Lean Production Model

The lean production model examines production with the goal of increasing company profit by focusing on cost reduction and waste elimination in the organization. Any process that doesn't add value to the customer is considered waste that could be eliminated to save money. The lean production model consists of five steps:

  1. Define value from the customer's perspective
  2. Identify value streams in the organization
  3. Create flow to the customer by eliminating waste
  4. Respond to customer demand
  5. Aim for perfection

Okay, let's now take a closer look at each one of these steps with some examples.

First off, by focusing only on activities that add value for the customer, all non-value activities can be eliminated to decrease costs and increase profits. When Mr. Pane reviewed the painting process for his windows, he noted that the paint used is ordered from overseas at significant cost. When the paint was originally chosen, no other paint was available, but now a much cheaper alternative is available locally. The quality of the two paints is virtually identical so continuing to use the more expensive paint won't provide any additional value, especially from the customer's point of view.

The value stream consists of all the activities that are used to create and deliver the product or service to the customer. In other words, what needs to happen to get the product to the customer? By focusing on what the customer wants, the organization can quickly respond to those needs.

Mapping the value stream identifies areas of waste, which can then be eliminated so that the product flows to the customer as efficiently as possible. Wow Windows mapped its value stream and identified that large amounts of material used in the manufacturing process are stored off site and must be shuttled to its production facility daily. The extra transportation is adding time and cost to each window it manufactures. Perhaps they could invest in an on-site storage to eliminate the waste.

Part of responding to customer demand involves understanding what your customers want and changing company processes to make sure it happens. A process review at Wow Windows revealed that many calls are made to the customer service department to inquire about warranty information. Customers have noted that it would be helpful for this information to be available online, which it currently isn't.

Changing the process and the location of the information will allow Wow Windows to save money, as its employees won't have to spend as much time on the phones and requests involving direct customer satisfaction may improve from this seemingly small convenience.

Finally, aiming for perfection means the process of creating value is never finished. Continuing to review processes and understand how they're connected will help to find more areas of waste that can be eliminated to save costs and increase profit.

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