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This article: Value within Lean
Source: Business-improvement.eu
Lean: Value adding organization
What customers are concerned with is the experience throughout the entire journeyIt is about the experience, which is subjective, relative and variable
What is "customer value" within Lean?
By Dr Jaap van Ede, editor-in-chief, 01-02-2021   [ Dutch version ]


Lean strives to execute only "activities a customer is willing to pay for". Those value-adding activities are seen as desirable, all other activities are waste.

However, something is amiss. First, making profit is elevated to the one and only purpose of a company, which is not very inspiring! Second, there are many other things, besides good product features and a relatively low price, which are valued by customers. For example excellent service, a great brand experience, or sustainability. These things that are not included in a traditional value stream map. In addition, there are also activities which can have a negative impact on the customer experience.

Therefore, a plea for perceived value as the new True North for Lean. It is equal to the benefits customers experience, minus their sacrifices. The weight of the pluses and minuses in the equation depends on the context: what do you want to offer your customers, and how good are your competitors in doing this?

When you follow a Lean training, you will probably hear the following definition of customer value:

Customer value= the sum of all activities that a customer is willing to pay for, because these activities add value to a product or service, by changing its function or form.


Sometimes, added to this definition is that all value-adding activities should be performed first time right.

Other actvities are seen as "waste", and should be reduced wherever possible. The way to distinguish value-adding from non value adding activities is value stream mapping. All process steps, "from sand to customer", are then made visible on a map.

The focus should not be on waste reduction and cost savings, but on raising the price / quality ratio. Therefore it is wise to use the following performance indicator: value creation, divided by costs. To prevent local optimization, this performance indicator should be calculated per value stream as a whole, thus from end-to-end. It is allowed to introduce some extra waste (costs) within one step, as long as this brings along bigger advantages elsewhere in the production chain!

VBHC
The idea of value creation devided by costs as performance indicator is in line with Porter, who sees this as the goal of Value Based HealthCare (VBHC).

IIf you apply VBHC properly, the customers are allowed to think along. In healthcare, this means that people, from a patient group undergoing a certain treatment, indicate what they find valuable

From this point it becomes interesting: patients do not only appreciate things that they (or rather their health insurers) want to pay for. If for example someone is diagnosed with breast cancer, this person greatly appreciates it, if it becomes quickly clear what the treatment path will be. This was discovered by Santeon, a group of hospitals working together in the Netherlands.

Not only product features are important, but the customer experience during the entire journeyNot only product features are important, but the customer experience during the entire "journey". On the photo the Dutch tall ship Europe


Experience

This shows that not only the medical value is important for customers, but also the experienced value: is the process taking place smoothly. The lesson from this: there are many things around a product or service that may or may not be valuable to customers.

That said, working with value defined as "activities that a customer is willing to pay for", remains useful in value stream mapping, because it is well possible to adjust the definition of customer value. I will return to this at the end of this article.

Mission
If you see customer value always and everywhere as "activities that a customer is willing to pay for, because those activities change products or services", this is risky.

It implicitely means that making profit is your only goal, a rather Anglo-Saxon idea. Is that really the raeson why you exist as an organization? And if so, does that result in enthusiastic and engaged employees? Will they be motivated to add much value?

I don't think so. The real value of a company is the mission it has in society. This mssion is not to sell as many products as possible, but to sell products that are valuable in the eyes of their customers.

Therefore, decisions about what you do or not in and around value chains should be based on a completely different performance indicator: does an activity contribute or not to your mission, and is this contribution in proportion to the costs you make for it. Regarding this it is useful to distinguish between value creation for customers, and value for other stakeholders such as employees and shareholders.

Contact moment
First I zoom in on the customer. Because Lean limits value to "function-adding activities for which customers want to pay", only activities within a production environment and / or supply chain will be seen as valuable.

However, marketing, sales and after-sales are also of value. In fact, every contact moment of a (potential) customer with a company counts.

In the article Towards a holistic view of customer value creation in Lean, Gülyaz et al.1 try to develop a measuring instrument, that includes everything a customer experiences. I deliberately use that word, because value for a customer is subjective. I will return to this later.

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Negative value
An interesting insight from Gülyaz's article is that there is also negative value. This means sacrifices made by customers, in order to obtain, use, maintain and ultimately discard a product. Those sacrifices are not visible as waste in a value stream map, when you use the traditional definition of customer value.

The boundary between negative and positive customer value is vague. If it takes a lot of effort to obtain a product, or if a manual is unreadable, this is clearly negative. But what about a great service, if a product has a defect? In that case, the negative impact will be minimized. You even might become a more satisfied customer than before!

Emotional value
A second insight from Gülyaz's article is that emotional value is also important. Consider, for example, a customer who is proud of a product from a certain brand.

Although not addressed in the aforementioned article, the fact whether a brand or product contributes positively to the world can also make people feel happy. So this is a form of value too. Think for example of products that fit with sustainability and with a circular economy. When you take this into account when you measure customer value, you will automatically balance Lean and Green.

Circular mattress, developed by Auping. Sustainability contributes to the emotional value of products
Circular mattress, developed by Auping. Sustainability contributes to the emotional value of products


Benefits minus sacrifices
When you combine everything discussed so far, you end up with:

Customer value = benefits (emotionally perceived or not)  -  sacrifices (emotionally perceived or not)


Lean pays little attention to emotional aspects, and to sacrifices by customers. However, these things can weigh very heavily. Compare for example a car that is easy to use and to maintain, and that has little breakdowns, with a car with high maintenance costs and many problems.

Customer value is relative. You "score" with your product or services when the benefits for customers are relatively high, and the sacrifices are relatively low, in comparison with products or services from your competitors.

Subjective
It is intriguing that, in a blog about change management, I ended up with a similar equation for success. Change is accepted if the benefit is estimated higher than the "price" people pay. So, if you do not want resistance to change, you must ensure that this balance is positive. Just like perceived customer value, the calculation is subjective and the outcome varies from person to person. It does not have to be correct.

The similarity between embracing change or not, and purchasing a product or not, is not surprising. In both cases you are asked to take action and to invest. In the case of change, the investment is in the form of (adaptive) energy and of time. In case of purchasing and learning to use a product it is money, time and energy you invest.

Also in the event of change revenues and sacrifices are weighed against each otherAlso in the event of change revenues and sacrifices are weighed against each other. When will these young swallows leave their nest?


Customer excellence
If you include indirect and emotional value in the customer value equation, operational excellence (OpEx) will deviate from customer excellence (CusEx). Opex will then be Lean applied to your internal processes or supply chain only. CusEx really means putting the customer first.

This can lead to dilemmas. In healthcare, for example, extra capacity means less waiting time in the eyes of the patient, but this increases costs.

Price fighters deliberately let their customers endure some inconveniences. How heavy customer contacts should weigh regarding value creation, therefore depends on whether a customer expects a low price,or a lot of service. Ikea for example relies much more on their operational excellence than internet shoe seller Zappos. They opt for customer intimacy.

Effective
Therefore you should determine first, what customer value you want to offer: what is effective in your case. After this, you should deliver this customer value as efficiently as possible, by optimizing internal and/or external processes.

Regarding the level of variability - how many different products do you deliver - there is a trade-off. The closer you want to approach the product (or service) desired by an individual customer, the more different products you have to make and deliver.

In the most extreme case your make products precisely tailored to the needs of each customer. However, more variation usually costs more. Only flexibility that is highly appreciated by customers is effective. It is not without reason that Lean strives for as little variation in processes as possible.

Subject to change
Customer value is not only subjective and context-dependent, but also subject to change. You can find a product good initially, but later you can become disappointed if it doesn't have a long life, or if the service is less then expected. In the worst case, marketing promises are not kept. The opposite scenario is also possible: you become increaslingly more satisfied after your purchase, for example because you get good service around a relatively cheap product.

Customer value is also relative. It is influenced by (possibly better or nicer) solutions competing companies offer for the same need. By seeing customer value as relative, you automatically get a good balance between continuous improvement (Lean) and continuous innovation (Agile). This will prevent that, after a while, you make products in a perfect way that no one wants anymore.

Other stakeholders
What has not been discussed yet, is that customer value is also influenced by value a company creates for other stakeholders.

If employees enjoy working in a company, and are proud of its products and services, this will be reflected in the way they communicate with (potential) customers. If you think that you are being treated well, then you will also treat customers well. Some companies for example permit employees to sport or follow a training during working hours.

The situation regarding contacts with suppliers is similar. If a relation with a supplier is good, then this will lead to products of better quality and to faster innovation, thanks to knowledge sharing.

If a company has shareholders, these must receive a fair return on their investments, otherwise the financing will be jeopardized.

Finally, the relationship that a company has with its immediate environment and with the world as a whole is important. This is also called the license to operate.

Perceived value
One last time I return to the value definition of Lean, with which I started this article. Is it possible to change it, so that it becomes correct? Surely:

Customer value = the sum of all activities a customer wants to pay for, because these actvitiies net increase the perceived value of products or services.


The phrasing 'wants to pay for' is still used in this definition. However, this is to be seen as things that a customer is passionate about. The big difference is that valued activities do not have to change the form or function of a product (or service) directly.

The fact that a product is only of value when it is used, is now taken into account. Products and services only come to its own if a customer can easily obtain them, and if a customer (whether or not after assistance) understands how he / she can use them. In addition, it is now emphasized that it is the perception that counts: things such as brand experience, and other customer wishes such as sustainability, are also important.

Smart Industry
Striving for customer excellence by maximizing the perceived value is becoming increasingly important. This has three causes.

First, customers (including business-to-business ones) increasingly give weight to the way products are created. Think of sustainability and good working conditions. Second, the percentage of customization is increasing: products and services become increasingly tailored to the customer needs. Smart industry makes it easier to do this, without increasing the cost price.

Augmented reality bij KONI
Augmented reality at KONI.  The progress concerning smart industry makes customer-specific production easier.


Third, products are increasingly offered as a service. The goal is no longer to sell an item once, but to fulfill the needs of customers during a subscription period.

Due to these three trends, perceived value is increasingly more often becoming the new True North for Lean. Not value-adding activities is what you should focus on, but activities that add perceived value. This will result in value creation that customers experience and thus appreciate!

I wish to thank Prof. Jack van der Veen (Nyenrode Business University, Evofenedex Chair of Supply Chain Management) for his comments and additions, especially regarding customer excellence.

I also thank the hundreds of Lean companies I was allowed to visit and interview, and who were a source of inspiration for this article.

1Towards a holistic view of customer value creation in Lean: A design science approach, Erdoğan Gülyaz, Jack A.A. van der Veen, Venu Venugopal & Sam Solaimani, Cogent Business & Management (2019), 6: 1602924.



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