Lean 101: How Customer Value Changes with Your Business Model—and Why

Mar 18, 2014 12:00:00 AM

Data-Management

This is the first of several blog posts about lean principles and how technology can help manufacturers, distributors, construction companies, and professional service organizations take advantage of lean. Today, we take a look at customer value, the first phase in the lean cycle. Depending on your business model, how you understand and deliver customer value can be a very different endeavor. However, you always need to be in control of how you create customer value, so you can manage for continuous improvement while focusing on what you do best.

In lean thinking, customer value comes first. A company’s activities, output, and services need to have value for its customers, or they are considered irrelevant and wasteful. To understand and focus the customer value in their operation, companies perform value stream mapping, which defines and designs the flows of information and materials required to take products or services to customers. In value stream mapping, you review every action and event that happens at the company. Your output includes a documentation of the as-is value streams currently in place as well as the to-be value streams that would be optimal in order to always produce the customer value that the company is committed to. Depending on the complexity of their value streams, some organizations have dedicated value stream managers, but most give the accountability to people who have a stake in transforming processes and practices for better results. Companies sometimes resist making the effort to understand and document customer value and value streams, and focus immediately on production or other key processes, which can result in confusion and weaken a lean initiative.

Customer Value in Repetitive Manufacturing and Project-Based Companies

Repetitive manufacturing. When you repetitively manufacture identical products such as hand tools or mobile phones, your customer value may remain relatively stable throughout the life of a product offering, and the majority of customers share the same values with easily identifiable discrepancies. Every product, component, material, and process has its clearly defined value stream (or waste) that employees can understand. You have a reasonably clear path from as-is to the to-be value streams. You often can combine multiple customers in value streams, although there will still be different value streams if, for example, you use a variety of materials or several component manufacturers. This type of manufacturing often produces inventory, which can only be a safe and efficient practice if customer values and demand are visible and stable.

Repetitive manufacturing with some customization. If you make products that are largely identical but that can include capabilities, features, and materials that are individual to customers, customer value and subsequent value stream mapping become more complex. Part of your business may deliver to consistent, stable customer values. At the same time, those customer values and value streams may likely contribute or be part of your customer-specific output, which will have its own unique values and streams.

Project-based operation. However, if your business is project manufacturing, construction, or anything else that is project-based, your definitions of customer value may be different for every project, and your value streams certainly will. Unlike in repetitive manufacturing, where you can aggregate customer values and design to needs that you can profitably meet, each project meets a unique need and value streams will be diverse and volatile, requiring an effort to stabilize them. This is even more critical when you consider the budget and risk management aspects of projects, which are part of the customer experience.

Customer Longevity and Acquisition

Not only the quality, but also the longevity of customers differs in these business models. Customers of repetitive manufacturing companies may maintain a business relationship for years, as long as their needs remain the same. Project-based companies win customers individually and establish—or, at a minimum, verify—the customer value every time. Construction companies, for example, may have very different types of customers, such as private developers, public-sector entities, or enterprises—and even repeat customers may have different requirements per project.

Customer acquisition costs in project-based companies tend to be significantly higher, because customer relationships are generally not as lasting as in repetitive manufacturing. One sometimes hears the assertion—especially from project managers—that projects are lean by definition and that all project activities are strategic, because every element of a project is driven by customer value. Certainly, in project environments, the strategic role of the customer is closely tied to project delivery in a way that is unique to this operational model.

Aligning Sales and Project Execution

For project-based companies, the continuity between the sales cycle and project execution is critical in sustaining customer value. Companies sometimes create their own obstacles by switching customer-facing contacts once a contract is signed, and project managers may work with different information and from a different mindset than sales engineers and sales reps. As a result, initial project scoping, resource planning, and financials can fall widely out of sync. Customer value may suffer as well as customers’ ability to show value to their own customers, who rely on projects or services delivered to their expectations.

When we work with customers and our partners at To-Increase, we avoid this disconnect as much as possible. And, when I mentor junior consultants and we dig into projects together, I always emphasize that sales happens in every customer interaction and with every deliverable, and every sales call involves diagnostic consulting. The more congruent the mindsets in sales and project delivery are, the more intensely do customers want to engage, and we may often be able to deliver value to our customers as part of their team.

Support from Customer and Project Intelligence

Of course, it helps your lean initiative if you have the right technology tools to assist you. In a project-based business, your value stream definition typically becomes obsolete when a project ends, and you need to be able to understand and respond to any conditions that may impact value delivery as early as you can. If your ERP system provides you with actionable, meaningful business intelligence, you can more easily stay abreast of customers' changing strategies, goals, activities, and challenges. In project management, BI can help you make sense of data streams related to resources, assets, costs, milestones, and dependencies at any stage in the life of a project, so you can make course corrections and keep delivering customer value. In unique, complex projects much of the outcome can depend on having all that information available and understanding its meaning and value impact.

In our industry solutions, such as the To-Increase Construction Solution, we provide many of the capabilities project-based companies need to ensure they deliver customer value profitably. For example, the Advanced Project Costing functionality includes earned value analysis, which enables you to assess early on the progress and performance of projects against the planned scope, schedule, financials, and key performance indicators. Project Logistics, another set of capabilities, provides project managers with a complete view of the planned and actual utilization of resources and other project components.

In upcoming blog posts, we will dig more deeply in to customer value and value streams, and consider the other phases of the lean cycle. I welcome your feedback and questions; feel free to contact To-Increase.

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About Author
Clyde Bennett

Clyde Bennett

Manufacturing Industry Expert As a senior consultant, Clyde exploits his many years of manufacturing and ERP experience to help To-Increase customers become more competitive and productive by taking advantage of technology, enabling their people, and gaining fresh insight. He also collaborates with To-Increase partners to assist them in addressing customer challenges, and shares his expertise and creativity with the To-Increase team.

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