Dear Gemba Coach,
Every one says that lean is not just about cost cutting. But I fail to see how lean techniques can influence the top line. How can lean help in this area?
I was on the gemba yesterday in a service company that has recently lost several large contracts in a bruising competitive bidding process. We’re still trying to figure out how customers can expect the required service at the offered price and believe they will be disappointed with the purveyors they’ve chosen on price alone, but that’s what happens when purchasing gets the upper hand at your customers. So although there is hope these customers will come back, in the mean time there is a huge gap in the sales budget.
The company’s CEO immediately reacted by identifying a group of customers not targeted before. This company services large companies, and is now looking to interest smaller, more independent outfits. Half a year into the pivot, we were looking at the sales figures and although the company has succeeded in avoiding a loss, the sales numbers are not growing nearly as fast as needed to recapture lost gain. This is a classic situation for using lean techniques.
Lean Sales Strategy
First, the CEO asked the sales team to visualize on a large chart the budgeted sales for the month, and then visualize by blocks of types of customers. In this way, yesterday they were discussing the gaps between budget and actual (some are more, some are less) and the immediate reasons for this. It was an interesting moment for me, personally as I’d never been part of a discussion using lean tools directly in a sales environment before. And fascinating, because after the usual initial reticence (sales is different, not everything can be predicted, etc.) they started looking more deeply at what they where doing and asking why?
It’s true that lean techniques are mostly concerned with engineering, production, and supply chain management, and there has been little written about applying lean to sales and marketing. Yet I have no doubt that a case can be made that kaizen applies everywhere. None the less, lean is concerned with increasing sales and, to some extent, this goal takes precedence. Toyota did not become the world’s largest automaker by reducing costs alone. In a mature market, every car sold is a car taken from the competition. Toyota succeeded in becoming number one by steadily increasing sales and market share. The question is: what is the lean strategy to increases sales sustainably.
A lean sales strategy hinges on customer satisfaction. The aim is to make our product a standard in our customer’s household or business. Our product should be the one that all other brands are compared against, so that the decision to buy a competitor’s product should be questioned. Since repeat sales are generally easier to realize (i.e. cost less per sale) than acquiring new customers, the lean strategy is to make sure that anyone who buys one, will continue to buy. In effect, the worth of a customer in these terms can be computed as the dollar value of the product or service multiplied by the number of times the person is likely to purchase the same product in their life-time.
Forgetting the First Step
In the previous company case, the CEO also started a war room where two questions were posted on the wall:
- What is the key to winning the trust of small independent customers?
- What level of delivery could be done at the bidding price for the large customers?
As many experiments were conducted over the months since the contract loss, some answers started to emerge – for instance, it appears that independent customers are very sensitive to initial response time – the time it takes to give them an answer, not the time it takes to actually do the job, which clearly large customers are not. On the other front, the management team realized that as large customers had traditionally looked for always more service, the offer had been enriched with many side services which could probably be pared down for a stripped-to-bare-bones service.
In short, we were having a discussion about value. Specify value is the first principle of Lean Thinking, Jim Womack and Dan Jones’ cornerstone book that launched the lean movement. Yet, because this is hard to do, most practitioners skip that first principle and move on to flow: aha, this we can do! Yet, value is what it is all about, and what supports sales.
Making our product the standard for our customers relies on both manufacturing and engineering. Not surprisingly, one function that emerges strongly in a lean company is manufacturing engineering as the arbiter between engineering designs and manufacturing capability.
In manufacturing terms, customer trust is gained by:
- Zero defects
- 100% on time delivery
- Regular price reduction or value increase (adding new features for the same price)
- Show of good will in any after sales service;
Many industrial managers will complain of the cost of getting it right 100% for the customers, which can involve special transports, extra 100% quality inspections and more. However, if we measure the customer by his or her total worth, we see that the price of 100% right is not that high relative to the customer’s worth; and as long as we don’t slap ourselves on the wrist by paying for anything less than 100% right, we’ll never fix our problems.
Truly putting the customer first in manufacturing goes a long way towards making the product a standard in the customer’s environment. However, it won’t help much if the product is not designed fit-for-use.
How can we design products so that they become a standard for the customer? One way of looking at a product or service is that it solves a number of problems for the customer. As Marketing guru Ted Levitt once put it, “People don't buy a quarter-inch drill bit, they buy a quarter-inch hole.” One can therefore list the problems our product solves for the customer. A teapot will solve the problem of brewing the tea, solve the problem of letting the tea getting cold, and solve the problem of serving the tea. Many teapot designs don’t solve the problem of not burning yourself when you pick up the teapot and not spilling tea when you serve it.
In effect, the more problems you solve for the customer (including aesthetic sensibilities: a teapot can also solve the problem of looking decorative on the kitchen shelf), the greater the chances of creating a standard against which all other teapots will be compared. The temptation would them be to look at all the problems you can think of and try to solve them all at once, and thereby creating the “killer app” that is going to take all the market away.
The manufacturing side of the previous company had long focused on the value its products provided to its customers (the equipment being the basis for the service business). Being adept of lean thinking, the product business unit manager had first focused on customer quality and complaints. After cleaning up an impressive list of issues (and doubling sales in the process) the fundamental questions started to be addressed: what value the product truly provides to the customers? In the end, the team more-or-less settled on the idea that beyond all bells and whistles, the product delivered measurement and distribution. Kind of like saying that what makes a great car is essentially the engine and the gearbox (of course, you need the rest but that is where the customer difference lies). So, in the end, value was specified as measure, distribution, and cost of ownership.
The upshot is that the engineering team then focused on improving the measurement system to a point well beyond current market specs – which, once successful (difficult project, lots of mishaps, took too long, and so on), delivered a spectacular increase in sales. Over the entire period from (1) fixing quality issues relentlessly and (2) improving the “core” function, market share almost doubled in a mature, saturated market. The fascinating part from a lean point of view is that customers had never asked for this improvement. Marketing had not believed in its market impact until, grudgingly, it was impossible to deny after the fact. The gamble was made by engineers trying hard to figure out what customers really sought.
In the process of seeking value, the engineering team had to resist marketing’s call for the new product that would take all the market by having all the right features. The hard issue was to learn what exactly customers would buy as opposed to what they said they would (in cognitive terms, customer’s “espoused theory” is often very different from their “theory-in-use)
The lean approach is not about gambling all on the next brilliant product, but learning to narrow down value and deliver it. Rather than make a huge gamble on coming up with a new product that will solve all customer problems at once, we can commit to a new product release at regular intervals – say a product renewal “takt time.” At each takt, we vow to solve more customer problems than were considered last time. In this way, we can progressively enrich the product – occasionally transforming it radically along the way (at some point, by solving point by point problems some “killer app idea might emerge.) In doing so we will progressively extend the list of problems the product solves for the customer but without ever making a huge intuitive leap into what the customer might want in the future;
This progression is consistent with the lean idea of innovation: solving today’s problems with tomorrow’s technology, rather than using today’s tech to try and solve tomorrow’s imagined problems. Furthermore, this approach to innovation also dovetails with manufacturing inasmuch as some problems we solve for the customer can have their root cause in our own manufacturing processes. Customer complaints are the most accurate source of potential value. By examining complaints at the customer’s Gemba and from the customer’s perspective, we can discover customer usages or preferences we had no idea about.
Question Product Strategy
In serious lean transformations, the first P&L line affected is sales. Delivering on time in full makes the backlog disappear (which increases sales mechanically) and halving customer complaints has a much quicker effect on reorder sales than people often anticipate. Cash is the second financial figure to show dramatic improvement as inventories go down (not at the expense of on-time-in-full delivery!). And finally costs come down as smarter solutions are found to sustain the lead-time reduction and eliminate waste.
The top line in the P&L continues to increase sustainably if customers start using our brand for all the similar products they use – they consider our product to be their standard. To do so, we have to constantly reduce the cost of ownership until the value-for-money ratio becomes unbeatable. Five out of ten vehicles Forbes estimates will make it past the 200,000 Miles are Toyota or Lexus (http://www.forbes.com/2010/12/08/most-reliable-cars-2010-business-autos-reliable-cars.html).
Not surprisingly, even in a year of horrid negative PR, three out of five Toyota and Lexus owners remain loyal to the brand when they buy a new vehicle, according to the J.D. Power and Associates Customer Retention Study released late last year. This is what fuels sales sustainably.
To achieve this we look at who we sell our products to predominantly, and we impose on ourselves a rhythm of product improvement by solving a few problems at a time for our customers. This might mean down to earth cleverness or dazzling (but validated) new technology. The point is that as we do that, the gaps with competitors increase because by the time they decide to catch up, they won’t have followed the same learning curve, and will have to pay for the increase performance or new features in hard cash.
Using lean to increase sales means taking a hard look at our product strategy and asking the question: “how can we improve products in order to sell far more to existing clients” rather than “What new product can I come up with to take the entire market?” The latter question involves working with both manufacturing and engineering to come up with a product that will establish itself as a standard for customers in terms of both conception and delivery. If you have no sales challenge for your lean effort, chances are you’re not putting customers first. In lean we expect sales to increase sustainably by building a basis for customers’ trust, and earning their loyalty – in terms of hard cash.
The challenge for the service operation is now to correctly specify the value of its offering. Surprising as it sounds, this is not an easy task and few companies are actually clear on this – yet it remains the first step of lean thinking.