Is Your Company Becoming Too Lean & Losing Out Because of it?

By Randall Orser | Small Business

It seems every business is touting the importance of being lean and mean. Lean manufacturing, lean supply chains and reduced overhead seems to be the recipe for today’s businesses, or at the very least, today’s version of how to succeed in business. It certainly makes sense given the severity of this most recent recession. However, was this move born out of necessity? Was it done to reduce excess, to become more competitive, or was it done simply because some companies wanted to emulate the strategies of other enterprises? Ultimately, was it done because it had to be, or were some companies pursuing this action simply because they read it was the right thing to do? Surprisingly, in a few situations, it was the latter.

There are many benefits to being lean. First, there’s the benefit afforded to companies who reduce their fixed expenditures. This reduces the company’s overhead and allows companies to offer more competitive prices. Second, pursuing vendor consolidation allows companies to streamline their supply chain and reduce inventory costs. However, there are also several drawbacks to pursuing lean principles. Some of these include reduced market presence, a reduction in the company’s service capabilities and the inevitable pursuit of a supply chain strategy that doesn’t meet the needs of the company’s customers or its market. The question you must ask yourself is whether your decision to become lean has limited your company’s ability to capitalize on opportunities. Was this decision made in your company’s best interests, or where you simply pursuing a course of action to keep up with competitors?

Understanding the consequences of lean principles

Lean principles are enticing. They are the ultimate solution to complex business problems. They represent the ideal scenario of reduced expenditures, reduced inventory costs and higher profit. However, are lean principles solid in theory and lacking in practicality? Do they offer the perfect solution to an imperfect business world? Ultimately, do they promise more than can be delivered? While lean principles do work for some companies, for others they are solid in theory, but lacking in their ability to deliver the goods. Becoming lean can lead to companies missing out on opportunities. So how does this happen?

Reduced market presence

One of the first areas companies cut in a recession is their marketing expenditures. Unfortunately, a few companies forget that marketing and sales are one and the same. Cutting back on marketing expenditures often seems like an easy decision. However, why would a company cut back on the one essential function that drives business? Why reduce the effectiveness of marketing and its ability to deliver sales opportunities? Surprisingly, some companies cut marketing expenditures simply because they lack the ability to track its effectiveness.

Several companies fail to see how marketing lowers their costs of finding new customers, how it increases gross profit, how it increases market share and stabilizes the company’s future and ultimately, how it addresses customer needs by answering their most pressing questions. When thinking of marketing, think of how much your customers need you in times such as this. Think of how they need your company’s support, knowledge, help and input during difficult times. Those companies who remain a strong player within their market are the ones who will benefit most.

Reduced service levels

One of the biggest impacts of becoming too lean is the eventual decline in the company’s service capabilities. Companies must clearly define those services that are deemed essential to sustaining business and retaining customers. After all, when times are tough, companies must do everything they can to retain market share. Therefore, it’s essential to clearly define the company’s essential services and to be mindful of the impact of cost reductions on the company’s ability to service its clients. What should companies look for?

A company’s service capabilities are defined by its internal and external clients. Internally, the company must have clearly defined procedures, work processes and seamless operations to improve how work is done and how fast it is completed. Who benefits the most from improved operations? The customer does. Therefore, understand that a company’s service levels include far more than just its customer service department. It includes how products are packaged, delivered, how customers are dealt with by accounting, technical support, as well as how sales & customer service can provide solutions. Becoming too lean will produce savings, but those benefits are easily eroded when customers are lost!

Reduced supply chain effectiveness

Companies need inventory to capture market share, but they loath the financing costs of supporting that inventory. Financing inventory is an extremely expensive part of running a successful business. Companies are right to identify inventory and their supply chain to reduce costs, but the mistake they make is by pursuing an inventory management and supply chain strategy that is not conducive to their business model, their market and their customers’ needs.

Instead of reducing costs by identifying their cost drivers, they instead change their inventory management philosophy by pursuing lean strategies they can’t possibly make work. This often happens when businesses decide to pursue lean supply chain practices like JIT, or Dell’s “Push-Pull”, when they lack the purchasing power, economies of scale and operational abilities to make either of these approaches work. Reduce your company’s inventory costs. However, start by identifying those costs and putting a plan in motion to reduce expenditures. Inventory may be costly, but you need it to capture opportunistic sales and maintain your market share.

Companies must be able to reduce expenditures and continually pursue initiatives that lower costs. However, they must also be mindful of the consequences of becoming too lean. There are benefits to improving operations, reducing inventory costs and streamlining supply chains. However, these benefits must be tempered with the consequences of losing market share and customers. Be sure that the changes your company makes are ones that are needed to improve your bottom line. Do what’s right for your business and not what you think you should do because other companies are pursuing the newest and latest trends.


About the Author

President/CEO Number Crunchers® Accounting Inc. Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.