Hopefully you caught the front page article in the Wall Street Journal on Tuesday discussing how Parker-Hannifin completely revamped its pricing strategy. While most company use the traditional "cost plus profit" approach, Parker-Hannifin embraced the lean concept of value from the perception of the customer and began to set prices based on the value delivered to the customer. Net income and return on invested capital went up 3x in four years.
I was so busy making copies of this article to send to business colleagues that I never got around to blogging about it. However our friend Mark Graban at the Lean Blog wrote an excellence analysis and discussion of the article.
This is a very important concept for anyone in the lean manufacturing world, especially if you are struggling with conventional pricing models. I encourage you to read Mark’s analysis.
Ken Tolbert says
Kevin,
Something I really appreciate about you and Mark Graban and Jon Miller is how you are focused on delivering quality lean manufacturing information without demeaning competition. Thanks for setting a great example for all bloggers and for teaching me something new every day!
Mark Graban says
Thanks Ken. We really have a great friendly blog community in the lean world, that includes Kevin, Jon, and many others (Jamie, Joe, Mike, Ron, Kathleen, Norman, Dwight, John, Ted, Karen, Bill and more). If I’m forgetting anyone, I’m sorry.
I appreciate it constantly.
That said, Jamie Flinchbaugh made a great comment on my post that P-H wasn’t just taking price as a given, they were trying to influence price upward by demonstrating value (or expanding value) to the customers, not just focusing on cutting costs, as I had suggested.
Another thing I sincerely enjoy about the lean blog world is if you’re wrong (or not 100% correct), someone will share the answer, usually politely and respectfully.
Let’s continue things that way.
Mike says
I’ve been in the automotive component manufacturing business going on 18 years and during that time the OEM customers have always set the price and forced cost improvements by pushing the price lower with each successive model change. We have always operated on the Profit = Price – Cost model. PH is coming to this rather late in the game and I think they should be more quiet about it until they have lived in this system for a couple decades. Only then can PH say they have truly embraced the concept. If they are selling products ten years from now for half what they are today and still making a profit they will have understood what being lean is really all about.
Mark Graban says
My reaction to the P-H article was “wow, that’s embarrassing” rather than “oh, look how innovative they are being.”
Joe D. says
There is nothing strategic about it…passing on increased costs (mainly for raw materials)to the customer. PH should focus on reducing costs by looking at their processes. In fact, why don’t they lower prices and then be forced to improve their processing costs. That’s real lean…I wonder how big the Washkewicz mansion is…….