“Get Me Exactly What I Want”Daniel T. JonesChairman, Lean Enterprise Academy

Frontiers of Lean Summit October 31, 2005

Getting What I Want

• What if consumers still can’t solve their problems because the specific item they need is not available when needed?

• It comes as a bit of a surprise that most upstream provision systems are not very well able to fulfil these exact needs– The right size shoe in the right style– The list of items in the shopping list– The basket of parts needed for the car service

• Why is this the case?

Grocery Fulfilment• Retailers and suppliers are impressed with a product

availability of 98.5% - which translates to a 92% availability on the shelf in the store

• But a customer with 40 items on their shopping list only have a 4% chance of finding exactly what they are looking for (92% x 92% x ….40 times) – one shop in 25!

• Retailers refuse to believe this – until they have to make the substitutions for customers when they begin fulfilling home shopping orders

• But poor fulfilment exists everywhere in the economy

Demand Amplification

• Long lead times mean production is based on forecasts – which are always wrong

• Inventories are held at many points to meet demand peaks and secure against supply problems

• Orders are placed for large quantities and infrequently to reduce freight and handling costs

• Ordering systems operate on different just-in-case assumptions and the original sales signal is lost

• And often gets overridden by informal manual interventions – promotions etc.

Lean Replenishment

• Lean reverses the traditional logic –– Only one ordering point in the provision stream– Increase the frequency of delivery at every point – Replenish only exactly what has just been sold or

shipped– And if possible….compress the provision stream

to bring production and distribution closer to customers

• This substitutes the pull of the customer for the push of the upstream assets

Reflexive Ordering

• The pull of the customer uses reflexive rather than cognitive information management

• Centralised cognitive systems try to gather all the information to try to optimise the entire process by feedback loops and sophisticated algorithms to direct every action within the whole system

• Toyota concluded long ago that small amounts of noise accumulates and instructions diverge from actual needs – triggering manual overrides – which makes performance worse – starting a vicious circle

Total System Costs• Instead of collecting more and more data lean

reduces the need for information and simplifies the decision logic

• Ordering little and often and delivering little and often is key to making this work

• An obstacle is each department considering only the “chimney costs” in their budget – rather than total provision stream costs for each item

• It may be worth spending a little more per item to save a lot more money on inventories, out-of-stocks, remaindering and lost sales

Tesco’s Lean Journey

• In 1997 Graham Booth, Supply Chain Director at Tesco asked how to apply Toyota’s lean logistics to the grocery business

• So we “took several walks” following products from the point of sale to incoming raw materials

• The basis for the cola example in Lean Thinking –taking 319 days to perform 2 hours of value creating effort from the mine to the customer

• These walks opened their eyes to waste and began the redesign of Tesco’s distribution system and collaboration with their suppliers

Learning from Toyota• Toyota spent 30 years developing lean in house and

spreading it up and down its supply chain • The most impressive example is aftermarket parts

distribution – supplying 500,000 SKUs to dealers • It operates as a series of tight replenishment loops

– Dealers call off parts from Distribution Centres every day– These shipments trigger daily orders to be picked up from

suppliers the next day– Most of whom can also make every part that is required in a

day every day• The result is the highest availability, lowest stock

levels and the smoothest order signals

Tesco’s Lean Replenishment• Home shopping orders are picked at slack times in

bigger stores• Store sales now trigger continuous re-supply from

Tesco’s distribution centres• Distribution centres are replenished twice a day from

goods picked up from suppliers – as Tesco took responsibility for all inbound logistics and consolidation from smaller suppliers

• Suppliers are increasingly producing to replenish stocks for the next day

• Fast moving products flow through to the store shelf on wheeled dollies – with no handling

The Consequences

• Total touches for cola have fallen from 150 to 50 • Throughput time has fallen from 20 to 5 days• Stocking points reduced from 5 to 2• Demand amplification has been reduced from 4:1 to

2:1• Availability on the shelf has risen from 98.5% to

99.5%• Equivalent to a “basket fulfilment” of 82% or

frustration only 1 in 5 rather than 24 out of 25 trips• And their supply chain costs are now lower than

others

“Provide Value Where I Want”

Daniel T. JonesChairman, Lean Enterprise Academy

Frontiers of Lean Summit October 31, 2005

Where is Cheapest?• Where would you go to get exactly what you want at

the lowest price? The “Big Box Retailer”?• We all believe in “economies of scale” – and in

“leaving out the middleman” – by shopping in an even bigger warehouse!

• But is this really the lowest cost option – compared to the alternatives? What about your travel time and cost?

• Do we have to trade off product price, product variety and personal time and hassle?

• Is the biggest store ultimately going to win?

Circumstances• Mass consumption focuses on customer

demographic attributes• And works out how to attract you to do all your

shopping in their format• Lean consumption focuses instead on customer

circumstances – and works out how to create a mix of formats to match these circumstances

• Recognising that we all use most of these different formats – depending on how pressed for time we are

• Allowing customers to obtain what they need without trading off price and variety against their time – does convenience need to cost more?

The Convenience Revolution

• Tesco realised that their lean logistics system could supply any format for almost the same cost

• They also listened to customers and created five different formats– Tesco.com – home shopping– Tesco Express – local convenience stores– Tesco Metro – in high streets– Tesco – standard supermarkets– Tesco Extra – out of town hypermarkets

• They are also expanding into every type of retailing

Knowing Your Customers

• The other key to making convenience formats work is knowing exactly who your local customers are and what they want

• Tesco learnt from studying Seven-Eleven Japan who did this for years – and learnt how to analyse the data from their loyalty cards to enable them to design different product ranges to match different types of customers and to custom range their stores

• Frequent store replenishment also means a bigger range and fresher products

The Ideal Store

• The next step is to create the ideal store for each customer

• By combining the local store and home shopping• Allowing the customer to order from home or at the

local store and have the items picked and delivered to the local store for pick up at the end of the day or delivered to their home

• Giving convenient access to all 80,000 products • Each point then goes shopping at the next level up

and delivers the baskets by frequent milk runs

Water Spiders

• Toyota pioneered the concept of “water spider”material delivery systems in its factories

• Which cuts inventories and improves the productivity of employees working on production

• There is a big opportunity to extend this “water spider” logistics system to make frequent deliveries and pick ups from every home and office – for all types of products

• Who will organise this final loop in the distribution chain – retailers, the post office, FedEx, UPS, DHL?

Winners and Losers?• What about smaller stores – lean replenishment will

help – but they do not have the buying power• Their future is in experiential shopping not

instrumental shopping• The challenge for bigger retailers is to create a range

of convenient formats served by lean replenishment systems

• Someone will be successful in every category of goods – forcing others to follow if they can

• But lean consumption signals the end of “one best way” and the “Big Box” of mass consumption