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The Power of the 5 Cost Management Strategies in Reducing Costs

27 Jul

A commonly quoted statistic is that 80% to 95% of the cost of a product is determined by its design and is therefore set before the item enters manufacturing. This assumption suggests that the dominant focus of Cost Management should be during Product Development and not during Manufacturing.

However, contrary to a widely held assumption, companies can integrate a variety of Cost Management techniques not only in the design phase but throughout the product life cycle.  This is to ensure that there is a substantial reduction in costs.  In fact, companies achieving Operational Excellence and competing aggressively on cost might consider the adoption of some form of an Integrated Cost Management Program that spans the entire product life cycle.

An organization must have a good understanding of Integrated Cost Management and the 5 Cost Management Strategies that they can use to reduce costs but still attain the desired level of functionality and quality at the target costs.

The 5 Cost Management Strategies

The 5 Cost Management Strategies play a crucial role in the company’s integrated approach to Cost Management.

The 5 Cost Management Strategies can be applied throughout the product life cycle with one technique used during the product design and the rest during manufacturing.

  1. Target Costing. This is a technique applied during the design stage. Target Costing is best used when the manufacturing phase of the life cycle of a product is short.
  2. Product-specific Kaizen Costing. This is a technique applied during the early stages of the manufacturing phase. It enables the rapid redesign of a new product to correct for any cost overruns. The primary rule in Product-specific Kaizen Costing is that the product’s functionality and quality have to remain constant.
  3. General Kaizen Costing. The third Cost Management Strategy, this technique is applied during the manufacturing phase. It focuses on the way a product is manufactured with the assumption that the product’s design is already set.  This technique is effective when addressing manufacturing processes that are used across several product generations.
  4. Functional Group Management. This is the technique that is applied in the production process. Functional Group Management consists of breaking the production process into autonomous groups and treating each group as a profit instead of a cost center. The switch to profit as opposed to cost allows groups to increase the throughput of production processes even if changes result in higher costs. It enables the change in mindset that functional group management induces.
  5. Product Costing. The 5th Cost Management Strategy, this is the technique that coordinates the efforts of the other four techniques. It does coordination work by providing the other four techniques with important, up-to-date information.

Target Costing vis-a-vis Kaizen Costing

Kaizen Costing as known as continuous improvement costing.  It is a method of reducing managing costs. Kaizen Costing has a similarity with Target Costing but it also has its differences.  (Note: Kaizen is the Japanese term for Continuous Improvement and often tied to the philosophy of Lean Management.)

Both Kaizen Costing and Target Costing can achieve results with lower resources. This is basically their similarity. On the other hand, the differences lie in their usage and involvement.

Target Costing is used on the design stage and requires the involvement only of designers. On the other hand, Kaizen Costing is used during the manufacturing stage and requires high involvement of employees.  The general idea of Kaizen Costing is to determine target costs, design products, and process to not exceed those costs.

Interested in gaining more understanding of these Cost Management Strategies? You can learn more and download an editable PowerPoint about 5 Cost Management Strategies here on the Flevy documents marketplace.

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Integrated Cost Management: An Organization’s Prescription for Lower Cost

20 Jul

There is a general belief among organizations that a large percentage of a product’s costs are locked in by design.  It is assumed that little can be done once the design is set.  This assumption has influenced cost management programs across diverse products’ life cycles. As a result, the focus during the design phase is Cost Reduction and Cost Containment during the manufacturing phase.

Yet, organizations that operated in a highly competitive market and demanded aggressive cost management showed that costs can be aggressively managed throughout the product life cycle.  Various cost management strategies or techniques may be used to increase the program’s overall effectiveness. One of them is the Integrated Cost Management.

A Purview on Integrated Cost Management

Integrated Cost Management is every organization’s prescription for lower cost and higher profits. It is the 21st business approach to achieving Cost Management efficiency.

Integration is necessary for Strategy Development as it can promote the achievement of the company’s profit objectives. In fact, there are major benefits to Integrated Cost Management. One of which is lowering of overall costs throughout the product life cycle.

Integrated Cost Management can facilitate a steady decrease in costs all the way to discontinuance.  In fact, it can result in an annual cost reduction of about 17% during manufacturing, savings that exceed 30$%, and a designed-in cost of below 70%.

Achieving this requires an understanding of the Integrated Cost Management Approach.

The Integrated Cost Management Approach

The Integrated Cost Management Approach focuses on the integration of cost management techniques which can lead to higher levels of cost reduction and superior overall performance.

The Integrated Cost Management Approach takes into consideration 5 Cost Management Strategies.

  1. Target Costing. This is the technique used or applied during the design stage.  It is a feed-forward mechanism that enables the retooling of the design of new products to reduce costs while maintaining the desired level of product functionality and quality.
  2. Product-Specific Kaizen Costing. This is a technique that enables the rapid redesign of a new product during the early stages of manufacturing to correct any cost overruns.  (Note: Kaizen is the general term for Continuous Improvement and often associated with Lean Management.)
  3. General Kaizen Costing. General Kaizen Costing is a technique that focuses on the way a product is manufactured with the assumption that the product’s design is already set. It is generally effective in addressing manufacturing processes that are used across several product generations.
  4. Functional Group Management. This is a technique that is used to break down the production process into autonomous groups and treat each as a profit center.
  5. Product Costing. Product Costing is a technique that coordinates the efforts of the other four (4) techniques by providing important, up-to-date information.

The 5 Cost Management Strategies enable organizations to better manage costs throughout the product life cycle, with just one (1) technique taking place during the product design and the rest during manufacturing.

The Key Takeaways

The application of the 5 Cost Management strategies has its key takeaways. These can be used as a guidepost in its application and a model of general concepts that organizations may consider.

One key takeaway is significant savings can still be achieved with short life cycle products and aggressive cost management focused on product design.   Taking to note this key takeaway, we have to consider that as the length of the manufacturing phase of the product’s life cycle increases, the opportunity for cost reduction increases.  Further, there is a need to explore the value of integrating multiple cost management during manufacturing.

Interested in gaining more understanding of Integrated Cost Management? You can learn more and download an editable PowerPoint about Integrated Cost Management here on the Flevy documents marketplace.

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The Devil is in the Details: Your Primer to a Lean Culture

3 Jul

Culture is essential today in helping employees and management survive in today’s environment. Survival has become a strong word today. Without culture, everyone in the organization would act or behave differently. No one would be able to anticipate someone else’s behavior, and no one would understand why people behave the way they do. When this happens, the organization’s performance would be very chaotic.

What is culture? Organizational Culture is a learned process and is developed by the organization as a response to the working environment established by the organization’s leadership and management team. It is established in all organizations, regardless of whether its development is guided or unguided. Either way, culture can have a positive or negative impact on the organization’s performance.

A Take Away at Corporate Culture and a Lean Culture

Corporate culture is a set of standards shared by members of an organization. It produces behavior that falls within a range that the organization considers proper and acceptable. Having the right culture will increase the organization’s chance to survive.

What is a Lean Culture? Lean Culture is a total system and represents a complete and comprehensive culture change in the organization. A Lean Culture enables lean implementation and represents a completely new way of managing the organization through Lean Management.

The development of a Lean Culture starts with a Lean Culture Framework.

The Lean Culture Framework

The development of a Lean Culture starts with a definition of a Continuous Improvement Lean Culture. As a starting point, the Lean Culture Framework consists of 5 essential elements.

  1. Definition. This element ensures that the organization gets to properly define what Continuous Improvement Lean Culture really means for the entire organization. When this is undertaken, improvement becomes a part of the organization’s culture.
  2. Translation and Integration. The second element ensures that culture is well translated and integrated into values and related behaviors. It is important for organizations to understand that strong values can guide the behaviors of people.
  3.  Strategic Applications. This basically refers to the strategic application of cultural elements. If problem-solving is one of the cultural elements, the strategic plan of the organization can take a problem-solving approach to achieve key targets.
  4. Diligent Development. This element focuses on the diligent development of a comprehensive culture. This ensures the alignment of programs with a long-term problem-solving culture of improvement of the organization and eliminates conflicting messages.
  5. Reinforcement. The fifth element ensures that reinforcement is undertaken with regular recognition. When this is done, the organization can expect to gain more improvements.

The five (5) elements of the Lean Culture Framework must be properly structured to ensure its effective implementation. In today’s business environment where Competitive Advantage and Operational Excellence is gaining ground towards sustainability, organizations just need to learn how to operate smartly and effectively. This can be done when a Lean Culture Framework is established and implemented.

The Devil is in The Details: The Implementation

Culture change typically is not greeted with open arms. To be successful, a Lean Culture change initiative must have a few DO-NOT-PASS-GO items. A few of these are leadership involvement and engagement, cultural dynamics, and education. Implementation of a Lean Culture Framework may seem easy but it is not. It requires care, patience, a bottomless energy source, and an iron will to succeed. It can be of advantage if organizations are well guided in undertaking a culture change. A well developed and thought-of plan can highly help organizations go through culture change with just a few bumps along the way.

Interested in gaining more understanding of Lean Culture? You can learn more and download an editable PowerPoint about Lean Culture here on the Flevy documents marketplace.

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When Physical Office Becomes Passe, Are We Ready for Virtual Teams?

20 Mar

Richard Branson, British business and philanthropist once said: “One day, offices will be a thing of the past.”

While organizations still need to travel to reach their physical offices, the rapid changes in the world are requiring businesses to form Virtual Teams. A Virtual Team refers to a group of individuals who work together from different geographic locations and rely on communication technology such as email, voice conferencing services, fax, etc.

Virtual Teams work well for an organization and is effective even from a communication perspective. In fact, it is known to complement well the Lean Management approach used by organizations. Studies from previous years have shown that well-managed, widely spread, Virtual Teams have been outperforming those that share office space. In fact, it has shown that using Virtual Teams can improve employee productivity by 45%.

In today’s highly competitive global economy, to be able to work smarter, organizations must be able to leverage the manifold benefits of a remote workforce. Likewise, organizations must also be able to manage challenges that come with working with Virtual Teams.

The 4 Core Challenges of Going Virtual

More organizations are opting to work with virtual teams. Virtual teams may have their benefits but it also has its challenges. Being able to manage these challenges will enable organizations to seize the benefits of remote workers.


There are 4 core challenges that organizations face when working with Virtual Teams. Let us take a look at the 2 core challenges.

  1. Virtual Communication. Having different time zones can be a challenge. This can lead to layers of complexity to the logistics of everyday communication. When time zones do not match, it can lead to less and less information being transmitted and can cause miscommunication. When working in a different time zone, there is a tendency to exchange information using email or instant messaging. But these may not be enough as it cannot convey as much meaning compared to vocal tone, facial expression, and physical gestures.
  2. Virtual Project Management. When working with virtual teams, the business must have a proper system and people in place. Virtual Project Management may cause some confusion and even delays. While digital tools are in place to facilitate remote project management and collaboration, it can be difficult at times to tell what each person is contributing. In fact, organizations need to put up a system to track whether the members of the virtual team are doing their required tasks.

In this digital era, Virtual Teams are becoming the new face of business operation and aligning itself with Digital Transformation. This is a global reality that businesses must accept. However, working with Virtual Teams brings a lot of challenges not only in Project Management and Virtual Communication but also in Talent Development and Technology Support. Talent Development and Technology Support are two other core challenges that can make an impact on the Virtual Team. How it is managed will define the success of your Virtual Team.

In hindsight, Virtual Teams can also bring so many benefits. Hence, it is not surprising that despite the challenges, a lot of businesses still prefer to work with Virtual Teams.

One core benefit is increased access to top talent. The world has become a global market for expertise and talents. Businesses can extend their reach to other countries in their search for needed expertise. In fact, working with virtual teams will open opportunities for businesses to work with experts in various fields with various experiences. Being able to employ the best and the brightest is more than enough for businesses to continue working with Virtual Teams and conquering challenges. Businesses just need to have appropriate support programs to give Virtual Teams a home-field advantage.

Interested in gaining more understanding of  the challenges & benefits of Virtual Teams? You can learn more and download an editable PowerPoint about Virtual Teams: Challenges & Benefits here on the Flevy documents marketplace.

Are you a management consultant?

You can download this and hundreds of other consulting frameworks and consulting training guides from the FlevyPro library.

Are You Interested In Transforming Your Traditional Warehouse into a Lean Warehouse?

23 Feb

As the last decisive step in customer service, a warehouse ensures cost effective distribution.  Latest technological innovation has turned warehousing into a competitive advantage.  It offers untapped potential for improvement. However, warehousing is a hugely neglected part of global supply chains.  There is inconsistency in picking, packing and shipping orders, storing receipts, and managing inventory and logistics operations.

These and the following roadblocks in the way of smooth warehousing operations and Lean Management exist in every traditional warehouse:

  • Lack of focus on acquiring technology to facilitate in improving efficiency and quality.
  • Inability to utilize a structured approach to ascertain the reasons for poor performance.
  • Lack of a big picture viewpoint pertaining to processes, costs, or external supply chain partnerships.
  • Absence of a continuous improvement culture to achieve warehouse operations excellence.
  • Lack of communication, organization, and proper training of resources.

These shortcomings call for implementing Lean Warehousing methodology to unlock improvement opportunities and savings in operational, efficiency, and maintenance related costs.  First initiated by Toyota, the Lean Warehousing approach has a deep emphasis on eliminating 3 basic limitations: waste, variability, and inflexibility. The Lean Warehousing methodology focuses on the following 3 improvement areas:

  1. Cost Reduction
  2. Customer Quality
  3. Service Levels

Cost Reduction

The Lean Warehousing methodology concentrates on increasing productivity and reducing operating costs.  This is achieved by:

  • Cutting undue walking and searching
  • Preventing needless replenishment, reworks, waiting times, and double handling
  • Upgrading demand and capacity planning and manpower allocation

Customer Quality

A Lean Warehouse seeks to take the customer quality to the next level by avoiding:

  • Order deviations
  • Picking errors
  • Damaged goods

Service Levels

Improving service levels is at the center of a Lean Warehousing methodology, which involves:

  • Reducing lead times
  • Enhancing on-shelf availability

Lean Warehousing Transformation

Lean Warehousing Transformation entails streamlining operations to identify waste, know how to increase service levels, implement standardization and innovative ideas, and learn to evaluate and manage performance.  Such transformation becomes a reality in an experiential learning environment and by developing organizational capabilities in 3 critical areas:

  1. Operating System
  2. Management Infrastructure
  3. Mindset and Behaviors

Operating System

The organizational capability to configure and optimize all company physical assets and resources to create value and minimize losses.  The focus areas under operating systems include eradicating variability, encouraging flexibility, and promoting end-to-end design.

Management Infrastructure                                                                   

The organizational capability to strengthen formal structures, processes, and systems necessary to manage the operating system to achieve business goals.  The focus areas under Management Infrastructure are performance management, organizational design, capability building, and functional support process.

Mindset and Behaviors

The organizational capability to manage the way people think, feel, and act in the workplace individually as well as collectively.  The target areas to focus on here include a compelling purpose, collaborative execution, up-to-date skills, drive to improve, and committed leadership.

Model Warehouse Implementation

Lean Warehousing Transformation necessitates developing a “Model Warehouse,” which presents facilities for supply chain people to practically experience state-of-the-art warehouse operations in a modern warehouse and shop-floor environment.  The Model Warehouse incorporates newest technology and systems, and offers real-life conditions for building capabilities—i.e., optimization of storage, pick and pack, and dispatch processes.  Newest technologies—e.g., Smart Glasses and HoloLenses—available at the facility help improve the performance of pickers significantly and execute multi-order picking efficiently.

Such a setting allows people to observe and analyze the performance of an exemplary warehouse and implement this knowledge at their own premises.  Leading organizations organize a week-long rigorous knowledge sharing workshop—in an experiential learning environment of a Model Warehouse—for their people to have a hands-on experience to learn Lean Warehousing, actual picking, packing, root cause analysis, and performance management.  The participants of the Model Warehouse Knowledge Sharing Workshop are excellent candidates for “change agents” to implement Lean Transformation.

Interested in learning more about Lean Warehousing, Model Warehouse Implementation, and Lean Warehousing Transformation?  You can download an editable PowerPoint on Lean Warehousing Transformation here on the Flevy documents marketplace.

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Making it Right the First Time: The Road to Operating Model Transformation

4 Dec

Lean Management plays a significant role in putting in place processes, capabilities, and tools to improve how businesses operate. But, the Digital Age has increased both the opportunities for businesses who know how to react and the difficulty of getting it right.

Tasks performed by humans are now more complex be it accessing information in multiple formats from multiple sources or responding to changing market and customer dynamics at an ever-increasing speed. As an increasing number of tasks become automated or taken over by cognitive-intelligence capabilities, companies need to learn from lean management. Like a sprinter who needs all her muscles to be finely tuned and working in concert to reach top speeds, fast-moving institutions must have a system to continually synchronize strategies, activities, performance, and health.

Many organizations understand the need to change how they work and have embarked on numerous initiatives, yet few have been able to get beyond isolated success cases or marginal benefits. Most companies recognize the need for a Next-gen Operating Model to drive their business forward their Digital Transformation initiatives. But, how they develop it makes a big difference.

The Next-gen Operating Model

There are 4 core pillars of a Next-gen Operating Model. Putting these in place will ensure its successful implementation.

  1. Autonomous, Cross-functional Teams. The first pillar is focused on empowering the team to own products, services, or journeys. Having autonomous, cross-functional teams, organizations can become nimble in building skills across their teams. They make anchor hires for key roles, set up rotational and train the trainer programs, and commit to ongoing capability building and training for key roles.
  2. Flexible, Modular Platform. The second pillar is focused o supporting a faster deployment of products and services. Having Flexible, Modular Platforms will enable technology teams to better collaborate with business leaders in assessing which systems need to move faster.
  3. Connected Management System. The third pillar focuses on driving a culture of continuous improvement that cemented on customer needs. A Connected Management System will ensure that Management systems are evolving to create feedback mechanisms with and between various operations and teams.
  4. Agile, Customer-centric Culture. The fourth pillar is focused on speed and execution over perfection. Having an Agile, Customer-centric Culture is critical to success. It leads the change from the top and builds new ways of working across organizational boundaries. When functions and teams collaborate, effective time to market to reduced as well as operational risk.

The path to building up the Next-gen Operating Model follows well-defined approaches to guide organizations. These approaches will be every organization’s guide to operating model transformation during the first 12 months.

Following the 4 Critical Approaches to Operating Model Transformation

The 4 critical Approaches to Operating Model Transformation works well when there is a broad and top-down organizational mandate for change. Before anything else, organizations must make sure that the change mandate is in place so that the entire organization is aligned with the proposed change.

One of the 4 Critical Approaches is the Innovation Lab. The Innovation Lab is a dedicated unit set up to be entirely separate from the historical culture, decision-making bureaucracy, and technical infrastructure of the main business. It hatches new business models in an informal setting. It is best used when there is a need to move very quickly in response to market pressures.

Mastering these various approaches will enable organizations to better go through the Operating Model Transformation in the most effective way with the greatest impact.

Interested in gaining more understanding of Operating Model Transformation? You can learn more and download an editable PowerPoint about Digital Transformation: Operating Model Transformation here on the Flevy documents marketplace.

Are you a management consultant?

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