One of the fundamental concept of Toyota Production System is non-cost principle.All the companies are fixing their selling price based on the following formula:
Cost + Profit = Selling price
According to this formula, if the cost of producing a product increases, then the selling price also increases when profit remains constant. The cost increases due to many reasons i.e. increase in raw material cost. Most companies are thinking that these cost increase is not in their control.So they increase the selling price.
Toyota neither accepts this formula nor the concept. According to them, the selling price is fixed by consumers and the company doesn't have much control over it. The company fixes the profit target so the only variable, according to Toyota, is the cost.Toyota uses different principle, called non-profit formula, to manage the cost.
Selling price - Cost = Profit
According to this formula, the only way to increase the profit is reducing the cost of manufacturing. How to reduce cost? This question leads to the philosophy of Lean manufacturing, i.e eliminating waste.This is basic concept behind Toyota Production System, based on which all the lean concepts are innovated.Toyota found 7 forms of waste in manufacturing:
1. Waste from overproduction
2. Waste from waiting times
3. Waste from transportation and handling
4. Waste related to useless and excess inventories
5. Waste in production process
6. Useless motions
7. Waste from scrap and defects
Adoption of non-profit principle and elimination of these waste made Toyota to sell cheap cars over 3 decades.
Cost + Profit = Selling price
According to this formula, if the cost of producing a product increases, then the selling price also increases when profit remains constant. The cost increases due to many reasons i.e. increase in raw material cost. Most companies are thinking that these cost increase is not in their control.So they increase the selling price.
Toyota neither accepts this formula nor the concept. According to them, the selling price is fixed by consumers and the company doesn't have much control over it. The company fixes the profit target so the only variable, according to Toyota, is the cost.Toyota uses different principle, called non-profit formula, to manage the cost.
Selling price - Cost = Profit
According to this formula, the only way to increase the profit is reducing the cost of manufacturing. How to reduce cost? This question leads to the philosophy of Lean manufacturing, i.e eliminating waste.This is basic concept behind Toyota Production System, based on which all the lean concepts are innovated.Toyota found 7 forms of waste in manufacturing:
1. Waste from overproduction
2. Waste from waiting times
3. Waste from transportation and handling
4. Waste related to useless and excess inventories
5. Waste in production process
6. Useless motions
7. Waste from scrap and defects
Adoption of non-profit principle and elimination of these waste made Toyota to sell cheap cars over 3 decades.
