One phrase you rarely hear at companies with a keen understanding of lean is “the cost of doing business”. In fact, that particular expression is a sure fire indication that the person using it has missed the central point of lean entirely. There are few, if any, universal ‘costs of doing business’. There are only costs of how management has chosen to do business.
Take supply chain expenses, for example. Accounting typically does a very good job of burying it in product costs and overhead rates so deeply that it cannot be found. However, if you were to add them all up – freight, warehousing, material handling, all the expenses involved in the purchasing and scheduling functions … all of it – you would be looking at the cost of how management chose to execute the supply chain. It has nothing to do with the individual items you buy, make or sell. None of it is mandated by an Act of either God or Congress. It is not a necessary cost of doing business. It is completely the cost of the choices management has made.
Select another approach to the supply chain and all of those costs can and will change.
Same is true with everything related to how you sell. Same is true with how you decide to run accounting, HR and the administration of the company.
It is not some non-negotiable cost of doing business, yet most companies view it that way, as though the basic model is compulsory and all that can be done is to try to whittle pennies off of it to make it less costly.
You can really see the complete convolution of the thinking behind these non-value adding expenses in this silly article from CFO.com. “According to a CEB analysis of the S&P 500 and S&P Euro 350 companies, marketing budgets were up 6.5% in 2013 compared with 2012, while IT costs rose by 5.0%, legal costs by 2.8%, procurement costs by 2.5% and finance costs by 2.3%.”
Why are all of the sales, general and administrative costs going up? “Increased complexity is to blame.” That rationalization is tossed about as though complexity is an unavoidable fact of nature – or economics. In fact, complexity is a choice. Take Campbell, for instance – the soup company. Their SG&A costs add up to some 21% of sales. That is hardly the result of some irrefutable law of business. It is the result of choosing to run the business with a mega-massive SAP system, of choosing to hire a boatload of people one at a time to work at corporate headquarters, and choosing to spend a ton of money on advertising instead of on enhancements to the value of the soup.
Is it really that complicated to make and sell the most well known and iconic products on the planet – Campbell’s tomato and chicken noodle soup – into the biggest economy in the world? Only of you decide to make it so.
Managing the infinite details of each can of soup made by such a huge company via a giant computer in New Jersey is complicated work to be sure. But no one said they had to run the business that way. They chose it. It is not the ‘cost of doing business’. It is the cost of management choices. Calling it the cost of doing business is actually just a means of ducking management accountability for the results of their choices.
Attempting to break these big cost categories down into allocations and charges to each specific item is a fool’s errand that does little more than bury them and mask the real cause and effect. Overhead expenses are not product specific, nor are they unavoidable. Rather, they are the costs of business model choices and should be understood as such.
What enables lean companies to stand out and reach great heights of performance is an awareness of this simple truth. They choose to adopt business models that empower front line folks, rather than control all the details from the top. They select approaches to the various business functions driven by two principles: Focus and simplification. They operate by simple, common sense accounting statements, process aligned organizational structures, simple demand pull, rather than complex forecasting and ERP, and a few clearly understood metrics and goals.
It’s very important to remember that about the only thing that adds less value for customers than management is the lean consultant. None of us are necessary; none of us are simply the cost of doing business; and the only justification for our existence is the degree to which we enable, facilitate and empower the folks who do actually create value do more of it.