Sunday, March 10, 2013

Who is the Customer for a Commodity?

Teaching lean in an organization generally involves discussing activities that do not add value to the company’s products or services - with value being defined as anything for which the customer is willing to pay.  However common this approach is, though, it can be much more meaningful to companies in some industries than others.  For industrial or consumer products industries - a car or medical instrument, for example - people are generally able to think like their customers and comprehend fairly accurately what they would and would not be willing to pay for.
But what if the company’s product is a commodity?  Commodity producers tend to be so far removed from the customer that it is difficult to think in terms of what consumers would consider value.  Also, commodities lack differentiation on the basis of quality and, since prices are directly set by markets, the idea of determining value based on what the customer will pay for does not necessarily make sense.
For products like oil and gas, precious metals, grains, and even some financial instruments, it doesn't theoretically matter how much waste is inherent in the company's processes; when prices rise,  revenues rise and when prices fall; revenues fall.  Products are delivered to a broker, terminal, or market where they are sold without regard to who supplied them.
Market prices have such a dramatic effect on the financial results of commodity producers that when prices are high, little attention is given to waste, and when prices are low, costs are often slashed without regard to improving the processes that produce the product.  Providing clarity around the definition of waste, however, can drive improvement and lower the commodity price point at which the company can remain profitable.  Also, reducing waste in processes, as compared to slashing costs, tends to result in improved safety  and higher levels of production.
ExxonMobil and Chevron are examples of highly successful commodity producers, each consistently reporting net income in the billions of dollars.  The quality of the oil and gas that each produces is much more related to the geographic area than their own processes and they have no control over the price they receive.  It’s a pretty safe bet, however, that like most organizations, both have a significant amount of waste within their operations
At the most basic level, the profitability of Exxon and Chevron are determined by the difference between the market price of oil and the costs to extract it from the ground.  And since they have virtually no control over the price of oil, they must focus on what they can control - the costs to find and produce the oil - and it is here where waste can be found.
So how does a commodity producer define waste?  Since the market is the customer and inherent waste cannot be passed on to the customer, the concept of what the customer will or will not pay for does not really apply.  To clarify the meaning of waste, commodity producers have to look to their purpose and product for a more usable definition.
For example, it is important for people working in a company that mines gold to understand that the operation exists to "mine gold safely, efficiently, and in a socially responsible manner."  When this is clearly understood, waste can then be defined as anything that does not contribute to mining gold in a safe, efficient, and socially responsible manner.  Improvement can begin when people realize that their jobs exist to either mine, transport, and sell gold or support someone else who does.
Basing waste on customer satisfaction can apply to internal customers, but only after there is clarity around why the company exists and what it is trying to do.  Identifying internal customer requirements and measures will be very difficult, if not impossible, without first establishing what constitutes waste for the company's end products.
Lean professionals must understand the company and its processes before attempting to teach or coach people about continual improvement.  Relying on canned approaches like defining waste in terms of what the customer will or won't pay for can confuse people or strengthen the perception that lean is another management fad that doesn't apply to the company's situation.

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