Make the Most of Your Lean Processes by Adopting Lean Pricing Strategies

In “Advice to a Young Tradesman” Ben Franklin told us that time is money. That’s something Eiji Toyoda took to heart as he developed the principles of Lean Manufacturing.

Lean is about rooting out waste. Delays, excess handling and errors are anathema and every resource is brought to bear on their elimination. The result is a lean operation where material flows like water. Each process step adds value, every item is produced right first time, inventory shrinks to almost nothing and velocity (the speed at which orders travel through the factory,) increases so orders are satisfied faster.

The results are well-known: less money in inventory, and faster payment receipts. It’s just good business. So why aren’t Lean principles applied elsewhere? Take the pricing and quotation process for example. Here’s an activity ripe for “leaning.”

Waste in pricing and quotation

Pricing is complicated. Hitting that sweet spot high enough to maximize profit yet not so high that the customer goes elsewhere takes both good data and good judgment. That’s why the process can seem so convoluted, with delays and steps being repeated. But imagine if quotations went out faster, and prices were ‘optimized.’

Many times customers care more about speed than price and the first to quote wins the business. There’s a clear opportunity for more profit. And when price matters most it’s important to get it right. Any errors in understanding requirements can mean quoting too low, resulting in lost profit.

Leaning the pricing process

Just as in manufacturing, it’s easy to find waste if you know what to look for. Here are some of the signs in pricing and quoting:

• Double handling. Perhaps there’s not enough information, so someone has to go back to the sales person, or the salesperson has to go back to the customer.
• There are two types: mistakes in how the inquiry is captured and mistakes in how the price is calculated. For example, quantities or specifications might be wrongly recorded or data on competitors could be outdated. Errors like these lead to setting the wrong price and losing money or not getting the business at all.

How many queues does an inquiry sit in before it becomes a quotation in the customer’s hands? If the process isn’t lean and there are too many steps it could be days or weeks and that means lost opportunities.

Greater efficiency, higher profits

Lean manufacturing helps businesses become more efficient on the factory floor, and that translates to better profitability. The same applies to other processes: pricing and quoting is an area ripe for Lean.

With less waste throughout the process efficiency improves. There’s more capacity for quote preparation, fewer errors eating into margins, and higher prices, especially when the customer will pay a premium for speed. If you’re not using Lean methods in your pricing and quoting you’re not heeding Ben Franklin’s advice.