Lean business model definition
/What is the Lean Business Model?
The lean business model is designed to reduce waste in business processes. If an organization thoroughly integrates lean concepts into its operations, a likely outcome is a reduced need for cash, fewer errors, higher-quality products, and faster deliveries to customers. This approach works well for startup companies, which have little excess cash to invest, as well as for companies interested in improving their competitive positions. There are a number of concepts clustered under the general umbrella of the lean business model, including the topics noted below.
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Just-in-Time (JIT) Production
Under a JIT system, production processes are only operated when a customer has placed an order. This means that batch sizes tend to be very small, since only the amounts immediately needed by customers are produced. This shrinks the investment in work-in-process inventory and finished goods inventory. An added benefit is that production errors are usually spotted at once, since each part is inspected at the next downstream workstation. The result is higher-quality goods.
Total Quality Management (TQM)
Under a TQM system, a number of tools are used to gradually improve operations throughout a facility. Examples of these tools are statistical process control, failure analysis, and product design control. Over time, the result is a gradual decline in waste and expenses.
Throughput Management
Under throughput management, utilization of the bottleneck operation is closely managed. This means there is less need to invest in fixed assets outside of the bottleneck, which reduces the total amount of cash invested in fixed assets.
Minimum Viable Product
A startup business needs to create successful products before its funding runs out, and so issues a series of rapid product iterations that are designed to test certain product features in the marketplace at a low cost. The result is a lower investment in product development, as well as less time needed to devise products that are accepted in the marketplace.
Advantages of the Lean Business Model
There are multiple advantages to operating a lean business model, which include the following items:
Preserves cash. This model uses as little cash as possible, which allows a business to operate for an extended period of time without additional funding. This allows it to experiment with different business strategies, and also allows the original owners to retain a larger percentage of the business.
Enhances pivots. This model allows a business to more rapidly change course if it finds that its currently strategy is not working. Given the smaller number of employees and investments in fixed assets, it is relatively easy to reorient everyone (and everything) in an alternative direction.
Improves quality. This model includes total quality management principles, so it is more likely that higher-quality products and services will be issued to customers. This reduces quality-related costs, and also increases customer loyalty to the business.