As a customer, I am not willing to pay more than necessary. When I needed to paint the house, I compared service costs and customer reviews between service providers. Around 61% of internet users research a product online before making a purchase. These days is easier than ever to compare prices, which is why price strategy is so important. Most business owners use cost-plus pricing. This strategy sets the service price, adding a mark-up to the cost.
This formula implies that higher costs translate into higher prices. If your service price is higher than your competitors and the service is not much better, you are at risk of losing customers. There is a simple and effective solution to reduce operating expenses. What you need to do is to find waste and eliminate it.
Waste is any activity that does not add value from the customer’s perspective. For example, Company A paints with brushes and rollers while Company B paints with paint sprayers. To finish the job on-time, Company A needs more painters because their process is slower. Are you willing to pay more because their process time is longer?
There are eight types of waste: transportation, inventory, motion, waiting, over-production, over-processing, defects, and underutilization of people. Our friends from Company A have quite some waste in their business. The following are examples of each type.
- Transportation: moving paint cans in and out storage
- Inventory: keep enough brushes and rollers for 6-month service
- Motion: walking back and forth to the truck looking for the right size brush.
- Waiting: Waiting for the materials truck or instructions
- Over-production: Painting the fence when it wasn’t part of the request
- Over-processing: Paint the same wall five times
- Defects: Use the wrong color paint
- Underutilization of people: the new guy is wasting paint because he does not have training
One way to identify what areas of your business need change is by identifying waste. You can highlight the waste on the process on your process map and use the information to design a new process.
Do not make your customers pay for your inefficiencies. If you want to improve profits by controlling costs, it is important to learn how to identify waste.
This article was originally posted by Jina Rivera in Organization and Efficiency Solutions.