Defining Value in Lean Management

Lean thinking begins with one simple thing: Identifying Value. The core objective of Lean is creating more value for customers while optimizing resources. The organization will be able to build a value stream when it can identify wasteful activities and remove them from the workflow. By doing so, the organization will be able to deliver the value that customers expect and optimize profitability. While it may sound straightforward what does “defining value” actually mean in terms of its real-world application.

What Is Value in Lean?

In terms of Lean, the value should always be considered from a customer perspective. At the end of the day, it is not the great idea that matters but the fact if the customer does not see value in the final product, then he/she may not ready to pay for it. Thus, in simple terms: “Value is everything that the customer is willing to pay for”.

It is important to remember that customers enjoy value when it is in its entirety and not when delivered piece by piece. To illustrate the point, imagine that you bought a laptop. You had your laptop delivered, and when you try to run it, you realized that the machine is without an operating system. Now you need to buy the operating system and install it. Let’s assume you don’t have the knowledge to do this. It means you have to find a specialist who can make your laptop run. Both things will cost you money and time. In the end, you will have a working laptop after a week (if you are lucky), and you will probably never buy a device from this company again. Also, to point out a different perspective on the value in this example, you did not just need a laptop. You needed a laptop that can be used immediately to do work, play video games, music, and so on.

In the end, value is what customers want, along with the price they are willing to pay. When you figure this out, you can start mapping the work process and focus on recognizing value-adding activities and wasteful ones.

Identifying Waste Activities

When you have your processes mapped, you will recognize which activities add value to the end product and which ones do not. Value-adding activities contribute to the transition of a product from its raw to a completed state in the least possible time, at a minimum cost. For one activity to be considered as value-adding, it needs to meet the following three criteria:

1.     It moves the product downstream and helps it get one step closer to completion.

2.     It is an activity that the customer would be willing to pay for.

3.     The activity needs to be done right the first time. In other words, it does not require any rework, and neither you nor the customer should spend additional resources to make it better.

On the other hand, non-value-added activities affect organizational efficiency by delaying the product delivery process. They place a burden on the organization, and therefore customers would not be willing to pay for them. The non-value-adding activities fail to meet the above criteria and are generalized as waste.

The Lean theory recognizes seven types of waste:

• Transport (moving products that are not required to perform the processing)
• Inventory (all components, work in progress, and the finished product not being processed)
• Motion (people or equipment moving or walking more than is required to perform the processing)
• Waiting (waiting for the next production step)
• Overproduction (production ahead of demand)
• Over-processing (resulting from poor tool or product design creating activity)
• Defects (the effort involved in inspecting for and fixing defects)

One can easily remember them with the mnemonic TIMWOOD.

Where to add Value?

Companies know their processes and workflows best. However, it is important to differentiate necessary waste from pure waste. For example, testing software is a non-value-adding activity, but it is impossible to produce software without testing. Similarly, imagine that you have to buy a self-driven car whose software was never tested. You will probably prefer to cycle or walk.

So, keep in mind the following list of activities you can have in terms of Lean:

i) Pure waste – any activity that doesn’t bring value and damages efficiency. Usually, waiting is the most common type of pure waste.

ii) Necessary waste – activities that our customers have no interest in paying for, but they are required to maximize the end product's value. Such activities can be testing, planning, etc.

iii) Value – the definition of value in lean is everything the customer is willing to pay for.

In conclusion, customers do not care about waste activities. The only thing they care about is what value the final product can offer them. Hence, it is sensible to inspect work processes to try and eliminate waste as much as possible.

However, at times even customers cannot define the value in its entirety. In such cases, the progressive ones succeed by standing out from the crowd and adding value that nobody has seen before. Because sometimes, people do not know whether they need something until they see it. Just remember that no one ever knew what a PC or smartphone was until the product was presented to them.