Not long ago I was asked to meet with the folks from a big brand company – I won’t mention the name to preserve the confidentiality of the relationship but it is a 100+ year old company that everyone knows and just about everyone buys from (although you buy from them a little less every year, hence their bringing me in).
Their reason for bringing me in was to tell them what I thought it would take to get their five or six year old lean effort jump started. Seems they had been expecting big cost reductions from lean that just hadn’t been materializing. They had used lean to lay off almost 2,200 people and close 6 plants but somehow slashing and burning to lean just wasn’t making them any more profitable.
I worked up the data in the attached chart.
Soup cost breakdown
Their iconic product cost $1.34. The private label competitor cost $1.24. They already knew that, of course, and believed they needed to lean out another dime so they could compete. The problem I explained to them, was not the extra dime they charged. The problem is what a consumer gets for that dime … which is nada, zip, bupkis. They are already putting less into the value of their product relative to the private label guy.
The customer doesn’t care about the difference between $1.34 and $1.24. What the customer does care about is getting 60¢ worth of product for $1.34. With the private label they get 64¢ worth of product for $1.24.
This is the fundamental lean metric. – the value metric. With the big brand guy the customer gets 45% value while the private label guy is providing 52%. The big brand guy is slowly dying because customers are learning that they get more for their money from the competition. Note that neither of these companies is providing a particularly great deal compared to the truly lean companies I know. The key point is that it is not about being the cheapest. People don’t want to just buy the cheapest product they can find. What they want is to ‘get their money’s worth’.
Toyota is not an especially cheap car. It succeeds because it offers far superior value for the price. Same with Wahl Clipper and Aluminum Trailer. They don’t succeed beyond levels the big public guys can even dream of because they are the lowest price. They are actually relatively high priced compared to the rest. They succeed because their value ratio is much higher. When you buy their product you get a whole lot more for the money.
The ironic part is that, in pursuit of dirt low costs and all of their hacking direct labor with a machete and bludgeoning suppliers, the big brand guy actually ends of with higher costs. Those high costs, however, are in the form of massive marketing costs needed to try to dupe folks into thinking their decreasingly valuable product is worth the high price; and the cost of a massive SAP ERP system they think is necessary to find more pennies to wring out of value adding costs.
Lean is all about eliminating non-value adding waste, but convoluted accounting and mindless old school management drives them to see direct labor and direct materials as the only targets for cost reduction; convincing themselves that the massive heap of management waste is somehow necessary and good.
There is far more waste on the management side of the wall than there is in most factories. Incredibly, direct labor is only 7% of the total for the big branded guy, yet their senior management is driving the business to create more shareholder value by reducing it even further. There are no other targets in their ‘improvement’ sights.
An article in BusinessWeek criticizes P&G for their outdated, massive corporate business model, and rightfully so. The BusinessWeek article says that the corporate bloat stifles innovation, which is to be expected because the business press thinks innovation is the alpha and the omega of success these days, but their basic point is still valid. The real reason the smaller guys are bludgeoning P&G – which has exactly the same miserable value proposition problem my client does – is because of their cost structure. They don’t pour money by the billions down the brand management and ERP rat holes and wonder why the factories can’t get the costs down.