It’s that magical time of the year when traditional companies begin setting product and price standards for the upcoming year. Vast amounts of time are spent calculating… err… guesstimating absorption distribution percentages and peering into crystal balls to determine what materials costs will be a year from now. They then claim to accurately know the true "cost" of a product. What a joke. Didn’t we all just attend the Lean Accounting Summit?
But that’s not the point of today’s missive. Instead, how many of you send out or receive letters from customers and suppliers claiming that "with considerable effort we are able to keep the price the same as last year." What an accomplishment! I won’t even hazard to poke a stick in the eyes of companies that believe they should automatically raise prices in line with the CPI, regardless of value or true cost. The market sets the price, silly! Or didn’t you know that?
Let’s get back to the "lucky you we’ve kept the price flat" concept. What does that really mean? Don Boudreaux over at Cafe Hayek had a good anecdote today on what it means in the postal service.
It has been suggested that, because the nominal price of first-class postage is about where it was in the late 18th century, Americans who complain about the proposal to increase postal rates are merely whining wimps who are lacking in historical perspective.
However, the real price of transportation (a key input in postal service) has plummeted over the last 200 years. In 1799 it took 53 days for an Army courier to travel from Detroit to Pittsburgh. Today the same trip can conveniently be made in minutes. Likewise, the productive efficiency of the United States is vastly greater now than it was even a few decades ago.
Given the plunge in transportation costs, joined with other technological improvements and a large increase in the scale of postal activity, the price of postage should have fallen dramatically. Regardless of how today’s postal rates compare with rates in the past, opening the delivery of first-class mail to competition would lower rates still further while improving service.
Although it is obviously wishful thinking, presumably every company is working on improvement programs that should significantly outpace and offset overall CPI increases, otherwise they’ll soon be Chinese toast. Therefore there should be very few cases when true product costs actually rise, and those are probably due to screwups with initial pricing… such as those driven by overly-complex and inherently inaccurate standard absorption cost models.
How about trying a different tact this year, with letters along the lines of:
We appreciate your business and in line with our lean partnership we will be adjusting prices throughout the year as we continue to improve our overall value stream.
Or if you are still asked to provide single point pricing for the entire upcoming year:
After reviewing the market-driven value of our product our new price is xx. We would like to discuss with you how lean manufacturing methods can help us partner to create mutual success.
I guess I could envision a lucky situation where the market value of a product has increased, and no competitors have recognized and taken advantage of that situation. Just keep in mind that whether you are a customer or a supplier, your success is dependent on the success of the other party. Don’t take a page from the Detroit Three playbook where lean somehow equates to bashing suppliers into submission, and then wondering why they go bankrupt.