This article provides an illustration of how strategic cost management can make financial analysis a more powerful decision making tool. This idea is illustrated through the examination of the Levi Strauss Company’s past initiative to “lean thinking.” The lean initiative was part of an overall strategy of sustaining a competitive advantage. Beginning in the mid-1980s, starting with the automobile industry, companies have studied techniques on how to achieve sustained competitive advantage. Companies strove to create substantial increases in wealth by challenging the ways they implemented their strategies. One such process called value-chain-based analysis was achieved by performing these five steps:
Value: The value chain must be identified from the customer viewpoint at a disaggregated level - a specific product must be developed from the perspective of a specific target customer, at a specific price, at a specific place and time.
Value stream: Three elements of the value chain must be mapped - the physical stream originating with the first entity that supplies any raw input to the system, and ending with a specified customer (regardless of legal boundaries); the information stream that enables the physical stream; and the problem-solving/decision making stream that develops the logic of the physical stream.
Continuous flow: The focus must be on ensuring continuous flow and minimizing disruptions, such as those in a typical push-based batch-and-wait system.
Pull: To ensure continuous flow and to minimize disruptions, companies must create pull where the customer initiates the value stream.
Perfection: Finally, companies must strive for perfection by creating the virtuous circle, in which transparency in the system enables all members of the value chain to continually improve the system. The remainder of the article examines the success Levi’s Strauss has had by implementing value-chain-based analysis and focuses of their “Levi’s Personal Pair”...
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