What is “true cost”?


Lean can certainly help in getting commitment on specific financial targets and seeing that these targets are met on schedule, but not in the way one thinks, which is again one of the interesting paradoxes of this new way of management.

First, the lean approach is definitely more precise about costs. For instance, I was recently looking at purchasing practices in the automotive industry. In a traditional group, purchasing assumed a ballpark figure of a few percents of the part cost for transportation and holding. In a company that has been doing lean for years, there are tables to calculate the cost of the packaging, the amount of parts per packaging, the cost of holding parts at each point of storage, the cost of handling parts as well as the cost of transport. These cost hypotheses are first spelled out in an “ideal” lean situation: ex-works with daily quantities delivered at the factory, and half-hour delivery on the line, and the cost is worked backwards to define what the packaging and transport conditions will do. Now, clearly going from there to here didn’t happen overnight, and is the result of much step-by-step kaizen to understand the real cost of packing, handling and moving parts.
In fact, most traditional cost figures are based on implicit volume assumptions – which generally rest on the more the better as the more parts produced “contribute” more to covering the fixed cost of the machine.

Back at the origins of lean, much of Ohno’s writings center around understanding the real cost of operations as opposed to overproducing just to get the apparent cost down.

Certainly, one of Toyota’s most interesting reactions to the current crisis has been its redoubled effort to flexibilize fixed costs to adapt to the volume downturn – very cost, such as energy, waste, consumables is investigated with a toothpick to be reduced to the amount of real need at takt time.
As one does kaizen again and again, the true nature of the cost to produce one part becomes more apparent, and hence better managed.
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