October 1997 • Volume 7 • Number 10
The Low-Cost Producer?
By Tom Wallace
For those of you who work in the operations side
of manufacturing companies, I have a question: Do you have a
manufacturing mission statement and if so, what is it?
Saying it another way, what is your manufacturing strategy?
Based on my experience, in a random group of 100 manufacturing people, 25 or more would say: "to be the low-cost producer."
Well, I'm not so sure that's a good thing. Having as a primary goal to be the low-cost producer may not be an appropriate manufacturing strategy, and here's why:
First, where's the customer? Is it O.K. to have lousy customer service and terrible product quality? Of course it isn't, but focusing on product cost can certainly send a message that quality and delivery are less important.
Second, does the customer really care if your costs are lower than anyone else's? Does the customer even care what your costs are? Some may, but most are more concerned about your prices — what they pay — than what your costs are. In some companies, most often commodity types of businesses, price and cost are very tightly linked. In other cases, price and cost are less tightly linked. Ideally, price is what the people in marketing and sales feel will provide the best balance of volume and margin. Low product costs give marketing and sales the flexibility to set product pricing where they want.
Third, from the customer's point of view, there can be quite a difference between purchase price and total purchase cost. Purchase price is what's in the price list, minus any discounts, deals or whatever. Total purchase cost is what it costs the customer to not only buy the product, but to use it: costs for freight, receiving, transacting, inspecting, warehousing, handling, consuming, reworking, returning, scrapping, servicing, maintaining, paying the bill, and — oh yes — getting their orders for products, service parts and maintenance supplies on time and complete. Smart customers, at whatever point in the supply chain, focus on the total cost picture, not just one component of it.
My last point concerns motivation. Seems to me that "being the low-cost producer" lacks passion and fire. I personally find it hard to get excited about a statement that could be interpreted as saying "we make stuff cheaper than anybody else." For most people, concepts like delighting the customer, producing defect-free products, and adding high value can motivate far better than being the low-cost producer.
At this point, some of you might be thinking to yourselves: "Well, of course we want to provide superior customer service and ship a top-quality product. That's obvious." My response: Is it? Are you sure that everyone will make that connection? One of the bedrock principles of communication is to make the implicit explicit. Spell it out. Don't assume they'll make all of the same connections and come to all of the same conclusions that you have. Don't mislead by omission. Rather, tell them what you want to tell them.
And while we're at it, let's ask ourselves if it's
possible to do them all. Why not be the low-cost producer,
and at the same time, provide the very best deliveries, and
the shortest lead times, the best after-sale service and the
best everything else? Because you probably can't. The odds
are stacked against any one company being able to be its
industry's number one in all of these performance
attributes. And the risk is that, if you try to be number
one in everything, you may wind up being number one in
nothing.
What's the alternative
Am I saying that cost isn't important? Absolutely not;
it's critical. My issue with "the low-cost producer" is
fundamentally one of emphasis; it tends to crowd out the
other essential dimensions of manufacturing performance.
I think it's easy to rectify this imbalance, and at the same time to keep cost in a highly visible position. Simply substitute the word "a" for the word "the." All manufacturing organizations should be heavily focused on becoming a low-cost producer. You must be cost effective, or sooner or later, you'll fall victim to those who are. This doesn't mean that you have to be the absolutely lowest cost producer. A more effective strategy might be to stay close to number one in cost (so that marketing has pricing flexibility), and then to differentiate oneself on one or several of the other important elements: ultra high quality, flexibility, delivery, speed, service, advanced product attributes, etc.
One of the best manufacturing mission statements I've ever seen states simply: "Manufacturing's job is to create exploitable opportunities in the marketplace."
This does a number of things. It helps manufacturing people to look outward — to the customers — rather than inside the four walls of the plant. It says to marketing and sales people that manufacturing is an ally as opposed to an enemy (see the February 1996 installment of this column — "The Strategic Disconnect"). It enables people to prioritize improvement initiatives in manufacturing based on their impact with the customers. Lastly, it helps keep things in their proper perspective; one essential element of creating exploitable opportunities in the marketplace is to be a low-cost producer.
Tom Wallace is an independent consultant based in Cincinnati. He is the author of "Customer Driven Strategy: Winning Through Operational Excellence" (1992) and editor/author of "The Instant Access Guide to World Class Manufacturing" (1994). Tom is co-director and a Distinguished Fellow of the Ohio State University's Center for Excellence in Manufacturing Management.
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