What does “Value added” mean when improving your process?

Value added is an often-used term in many situations. In Finance and Economics it is used to refer to the profit: sales minus total costs. We also use it when talking about our products or services: they should add value for our customers.

But how do you decide what adds value for our customers – both internal and external – when trying to shorten our lead-times?

Everything that we do in our work adds value OR does not add value for our customers. And, as always, there is a “grey area” in between, so-called business value added activities.

Value added activities are those that the customer would want to pay for. For the rest, he/she won’t.

So if you spend your time searching for data, looking for documents, asking your colleague to answer your email because she forgot, getting internal approvals, filling your monthly travel expense forms, correcting some faulty data in your system, meetings, etc. are examples of activities your customer would not want to pay a penny for if you present them on your invoice. They are not adding value for the customer.

The reality is that you let them pay for all those activities anyway, but you do not itemise them on the invoice.

We let our customer pay for our inefficiencies. What can you do about it?

Option 1: do nothing.

You keep your inefficiencies, and keep therefore your costs high, so you have to charge your customers higher prices in order to create your own financial value added (profit). When your customer has not much choice, she will still do business with you.

At the end of the day, your margins are smaller, you charge your customer higher prices, and you need a higher sales volume to compensate for the smaller margin.

Option 2: reduce inefficiencies

If your aim is to provide value to your customers, it is a logical step to reduce and eliminate inefficiencies in every part of your business. You can learn how to do it in a practical, structured and measurable way at www.LeanSixSigmaBelts.com/black-belt.

This effort reduces your costs, increases your margins and you become more competitive on the marketplace.

Reducing inefficiencies (wastes) creates free capacity that was formerly occupied. As a result, you increase the capacity of your business: you can do more, serve more customers, deliver more products and services with the same resources.

This should be always our duty, in good times and in bad times. Don’t you think?

Beat the average.

Yours,

Peter

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