Process Improvement Project

lARVARD BUSINESS REVIEW

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Lean production transformed manufacturing. Now it's time to apply lean thinking to the processes of consumption. By minimizing customers' time and etfort and delivering exactly what they want when and where they want it, companies can reap huge benefits.

by James P. Womack and Daniel T Jones

OVER THE PAST 20 YEARS, the real price of most consumer goods has fallen worldwide, even as the variety of goods and the range of sales chan-

nels offering them have continued to grow. Meanwhile, product quality-in the sense of durability and number of delivered defects-has steadily improved.

So, if consumers have access to an ever-growing range of products at lower prices, with fewer lemons, and from more formats, why is consumption often so frustrating? Why do we routinely encounter the custom-built com- puter that refuses to work with the printer, the other computers in the house, and the network software? Why does the simple process of getting the car fixed require countless loops of miscommunication, travel, waiting, and defective repairs? Why does the diligent shopper fre- quently return from a store stocking thousands of items without having found the one item that was wanted? And

why is this tiresome process of consumption backed up by help desks and customer support centers that neither help nor support? In short, why does consumption - which should be easy and satisfying - require so much time and hassle?

It doesn't have to-and shouldn't. Companies may think that they save time and money by off-loading work to cus- tomers, making it the customer's problem to get the com- puter up and running, and wasting the customer's time. In fact, however, the opposite is true. By streamlining the systems for providing goods and services, and making it easier for customers to buy and use them, a growing num- ber of companies are actually lowering costs while saving everyone's time. In the process, these businesses are learn- ing more about their customers, strengthening consumer loyalty, and attracting new customers who defect from less user-friendly competitors.

MARCH 2005 59

Lean Consumption

What these companies are doing has a familiar feel: Just as businesses around the world have embraced the principles of lean production to squeeze inefficiency out of manufacturing processes, these innovative companies are streamlining the processes of consuming. In the early 1990s we popularized the term lean production to de- scribe the ultra-efficient process management of our ex- emplar firm, Toyota. We believe it is now time to recog- nize lean consumption as its necessary and inevitable complement.

"But surely," you say, "when it comes to consumption, less can't be more." Actually it can be, for both consumer and provider. Lean consumption isn't about reducing the amount customers buy or the business they bring. Rather, it's about providing the full value that consumers desire from their goods and services, with the greatest efficiency and least pain.

The key word here is "process." Think about consump- tion not as an isolated moment of decision about pur- chasing a specific product, but as a continuing process linking many goods and services to solve consumer prob- lems. When a person buys a home computer, for exam- ple, this is not a onetime transaction. The individual has

their customers play in these processes. It also requires consumers to change the nature of their relationships with the companies they patronize. Customers and pro- viders must start collaborating to minimize total cost and wasted time and to create new value.

That may seem like a doubtful proposition. But some companies-along with their customers-have started the culture shift that will make lean consumption possible. And they're finding that everybody wins.

Why Lean Consumption Now? While lean consumption would be a sensible idea in any era, we see several convergent trends that we think make it inevitable and, indeed, a competitive necessity now.

With the regulated economy steadily contracting, con- sumers have a broader range of decisions to make, from how to invest retirement funds, to what telecommunica- tions provider to use, to what airline to fiy at what price. At the same time, they must cope with a growing profu- sion of choices as producers relentlessly customize their offerings, pursue product niches, and increase their sales channels.

Some companies-along with their customers-have started the culture shift that will make lean consumption possible. And they're finding that everybody wins.

embarked on the arduous process of researching, obtain- ing, integrating, maintaining, upgrading, and, finally, dis- posing of this purchase. For producers and providers (whether employees, managers, or entrepreneurs), devel- oping lean consumption processes requires determining how to configure linked business activities, especially across firms, to meet customer needs without squandering their own -or the consumer's-time, effort, and resources.

The way to do this is to tightly integrate and streamline the processes of provision and consumption. The chal- lenge is not simply logistical: Lean consumption requires a fundamental shift in the way retailers, service providers, manufacturers, and suppliers think about the relation- ship between provision and consumption, and the role

James P. Womack is the president ofthe Lean Enterprise In- stitute (www.lean.org) in Brookline, Massachusetts. Daniel T. Jones is the chairman of the Lean Enterprise Academy (www.leanuk.org) in Herefordshire, England. They are the coauthors of Lean Thinking: Banish Waste and Create Wealth in Your Corporation (Simon and Schuster, 1996) and, with Daniel Roos, qf The Machine That Changed the World (Rawson Associates, 1990).

In this demanding environment, information technoi- ogy is steadily blurring the distinction between con- sumption and production. Consumers are doing increas- ing amounts of unpaid work on behalf of providers, such as entering data into Web-based order forms and tracking the progress of their own orders. And these consumers are spending more and more time and energy to obtain and maintain the computers, printers, PDAs, and other tech- nological tools needed to solve routine probiems - for themselves and for providers.

This growing burden on consumers might be sustain- able if not for the changes consumers themselves are un- dergoing. Household configurations in every advanced economy are transforming in ways that create additional time pressures and energy drains. TWo-wage-eamer and single-parent households, where no one has time to man- age consumption, are increasingly common; and aging populations are confronted with an expanding array of choices but have declining energy to address them.

Collectively, these trends give rise to the consumer's emerging dilemma of more choices to make and products to manage with decreasing time and energy. Yet the situ- ation also creates a major opportunity for providers.

HARVARD BUSINESS REVIEW

Lean ConsLimption

The Principles of Lean Consumption The concepts underlying lean consumption boil down to six simple principles that correspond closely with those of lean production. (For more on these principles, see our book Lean Thinking.)

1. Solve the customer's problem completely by insuring that all the goods and services work, and work together.

2. Don't waste the customer's time. 3. Provide exactly what the customer wants. 4- Provide what's wanted exactly where it's wanted. 5. Provide what's wanted where it's wanted exactly

when it's wanted. 6. Continually aggregate solutions to reduce the cus-

tomer's time and hassle. Let's examine these principles one at a time. Solve the customer's problem completely by insur-

ing that all the goods and services work, and work to- gether. Customers obtain goods and services to solve problems in their lives. But they don't acquire them in a single transaction, instead they search for, obtain, install, integrate, maintain, and dispose of them over an extended period - which is a lot more complicated. We don't just buy a car or a home in an hour to solve our mobility and shelter probiems. Rather, we search at length, find the right item, purchase it, and begin immediately to main- tain, repair, and upgrade it over an extended period as our needs change.

This complex process rarely goes smoothly. Consider personal computing, which now involves your camera, your PDA, and your phones. Most of us are less interested in the specific features of all these items than providers seem to think. What we really want is for everything (hardware, software, and support services) to work to-

gether reliably and seamlessly with minimal drain on our time and emotions. Yet we struggle endlessly with multi- ple providers of goods and services for our information and communication problems, all of which require our continuous unpaid management.

Why is this? Because providers, instead of working to- gether to perfect the entire consumption process, have created an enormous "failure industry" of help lines and service desks to deal with their individual piece ofthe so- lution. Their objective has been ever-greater efficiency (in terms of their own resources) at patching recurring cus- tomer problems. Their management goal has been to minimize the time needed to get the customer off the line while avoiding the hard work of getting to the root cause ofthe problem.

Lean consumption principles suggest a radically differ- ent approach. Rather than assigning the least knowl- edgeable personnel to deal repetitively (but "efficiently") with the same customer problems, a lean provider de- ploys highly trained personnel who not only solve the customer's specific problem but also identify Its systemic source. Management can then put permanent fixes in place, integrating the various elements ofthe solution, so that consumers no longer need to complain.

This approach has been pursued brilliantly by Fujitsu Services, a leading global provider of outsourced cus- tomer service. Companies that contract with Fujitsu to manage their in-house IT help desks find that the number of calls their desks receive about a recurring problem in- side the company - say malfunctioning printers - often falls to near zero. What Fujitsu does is identify and fix the source of the problem - for example, replace the fiawed primers with new ones fit for the particular purpose. By seeking the root cause of the problem somewhere up the value stream (often involving multiple companies),

MARCH 2005 61

Lean Consumption

Fujitsu has pioneered a way to eliminate i t (See the side- bar "Solving Problems at the Source.")

Don't waste the customer's time. Providers typically send a very clear message to customers: "Your time has no value."Just think of when you last had your car repaired. You called to make an appointment, took your vehicle to a dealer, went through numerous queues to explain the problem, arranged for a loaner vehicle or a ride to your destination, and then waited for the dreaded call with the diagnosis and cost of the repair. When you went to pick up the vehicle, you may have found that it wasn't ready. Or you may have waited in several queues (again) to pay for and collect the car, only to discover later that the re- pair had not been done right. (Surveys show that car re- pairs are done correctly and on time only six times out often.) The dealer squandered your valuable time-and goodwill.

The lean provider takes a different approach by look- ing at the problem from the standpoint ofthe customer and drawing a "consumption map" of all the steps in the repair process. Then, in each instance where the customer

is forced to expend time for no return in value, the pro- vider asks how the system can be reconfigured to elimi- nate wasted time.

Most managers instinctively assume that this will raise their costs, but the reality is just the opposite. Purging in- efficiency from the "provision stream"-the steps needed to create and deliver goods or services-solves providers' problems even as it helps customers. All those endless queues entail needless work for staff, and reworking jobs done wrong is even more expensive. By marrying a lean provision stream to a lean consumption stream (all the actions that must be taken by the consumer to acquire goods or services), providers can usually reduce their costs-and lower prices to consumers.

Skeptical? Take at look at Grupo Fernando Simao (GFS), a family-owned automobile dealer group based in Oporto, Portugal. GFS is the third-largest dealer group in Portugal, with 900 employees and group sales now more than $400 million. Since 1999, the company has introduced lean provision and consumption practices throughout its entire business. By prediagnosing every

^^^"^ Solving Problems at the Source •—•—•—>—>—•_>._>_)—>—>—)—^

Fujitsu Services is one ofthe largest providers of IT

services in Europe, the Middie East, and Africa, witii

15,400 employees in 30 countries and saies of $4.2 biiiion

in 2004. After providing technicai support for its own

products for many years, Eujitsu began to offer services to

companies that were outsourcing their customer service

and technicai support activities. Here Eujitsu has often

found itseifpiaying thedifficult roie of mediating between

hardware and software vendors and users about the prob-

iems the iatter encountered.Typicaiiy,firms like Fujitsu

are paid to respond to user complaints atthe lowest cost

per complaint handled. This call center model gives firms

no reason to reduce the number of complaints received

and, indeed, creates a disincentive: If the call volume falls,

so does the service company's revenue. Fujitsu approached

the problem with a completely different mind-set. It de-

cided to eliminate the root causes of callers'complaints.

When Fujitsu took over the help desk contract in 2001

for BMI (an airline formerly known as BMI British Mid-

land), Eujitsu immediately analyzed the different types of

calls coming in from BMI employees. Then it set to work

to understand the problems that gave rise to the calls; to

track the time and effort required to fix them; and, most

important, to measure the impact on the business of fail-

ures or delays in doing so. (Note that in this example, the

users being helped are BMI employees, such as the check-

in staff. Operationally, this works the same way as help

lines serving customers at,say, Dell or Microsoft.)

Fujitsu found that more than half the calls to help desks

were repeat complaints about recurring problems or

repair delays. One ofthe most common reasons for calls-

accounting for 26% ofthe total-was malfunctioning print-

ers: Ticketing agents kept finding that they couldn't print

boarding passes and baggage tags for passengers at check-

in. It was immediately apparent that solving the printer

problem was critical to the airline's business. Given tight

airport security, the inability to print boarding passes and

baggage tags that could be scanned at a number of points

could cause flights to miss their takeoff slots.

tJnder BMI's previous contractor, the help desk had strug-

gled to get service technicians to respond more quickly

so check-in staff wouldn't keep calling with complaints.

Fujitsu's response was to find the most cost-effective way

to eliminate the root cause of the printer problem. The

answer was to convince BMI senior management to spend

money up front to install better printers. As a result, the

number of calls about malfunctioning printers was cut by

more than 80% within i8 months. This action translated

into major savings in flight operations far exceeding the

cost ofthe new printers. In addition, Eujitsu improved

the technician-response process so that the average time

needed to fix printers that still failed fell from ten hours

to three.

Fujitsu coupled this problem-solving approach with a

different business proposition for BMI. Instead of being

paid for each call handled, Fujitsu asked to be paid a set

62 HARVARD BUSINESS REVIEW

Lean Consumption

car repair whenever possible, scheduling to eliminate queues, standardizing repair processes, and introducing other lean practices, GFS has removed many wasteful steps, increased the speed at which customers and vehi- cles move through the system, and reduced the totaJ cost to the company of the typical repair by 30%.

This approach yields more than just a cost savings for GFS: It's a boon for customers. The prices customers pay for repairs have fallen - especially in terms of wasted time-and most jobs are now fixed right the first time. Be- fore these changes, a customer could expect to spend about two hours searching for a repair shop, making an appointment, getting the car to the dealer, negotiating the repair, and collecting the vehicle at the end ofthe pro- cess. GFS's lean repair process has cut customers' time commitments almost by half-to an average of 69 min- utes. As a result, GFS has climbed from near the bottom of the car manufacturers' customer-service rankings to the top and has dramatically increased its share ofthe ser- vice business for vehicles it sells. (See the sidebar "Draw- ing a Lean Consumption Map")

fee based on the number ofpofent/a/callers to the BMI

system. This allowed Fujitsu to profitably offer BMI a

lower bid than its current vendor.

By addressing root causes, Fujitsu reduced total calls

to the help desk by 40% within i8 months and improved

customer satisfaction. As the company has progressively

applied this problem-solving approach to all of its custom-

ers, it has moved beyond its original role as a mediator

between vendors and frustrated consumers to become an

analyst and optimizer of entire IT response systems. Fu-

jitsu is solving the customer's problem completely-and

then some.

While discussing a customer's current problem, for ex-

ample, Fujitsu personnel pass on new information about

the user'5 computing systems, including how to prevent

problems the customer hasn't yet encountered but will, if

not warned. At the same time, Fujitsu can learn more about

what problems the customer is trying to solve with the

system, which can lead to ideas for new products. Instead

of simply fixing defectsso that customers get the value

originally promised, Fujitsu creates newvalue by offering

them additional information and services they might

want. What starts as a negative customer interaction can

turn into an opportunity for information sharing that builds

loyalty,generates fresh market intelligence, and saves Fu-

jitsu money. As a result, satisfied clients have rewarded

Fujitsu with extra work previously divided among compet-

ing subcontractors-a win-win for both parties.

Provide exactly what the customer wants. You may think that if current consumption systems do anything well it is to get customers the exact items they want. Not true. For example, the average item in a typical grocery store is in stock at the right location on the shelf only 92% ofthe time (this is called the "level of service"). Given that the average shopper has 40 items on a list, multiply the probabilities of finding each ofthe 40 items together and it's apparent that obtaining all ofthe items in the same shopping trip will happen only one time in 20. You can buy substitutes, or make additional trips, or change what you plan to eat, but the store is not giving you exactly what you want.

Shoe stores don't do any better. By relocating most pro- duction for North America and Europe to Southeast Asia and putting retailers on 150-day order windows, the shoe industry has created a marvel of low cost at the factory gate in combination with an extraordinary array of styles (about half of which only endure for one three-month selling season). But suppose you want the size nine"Won- der Wings" in gray? The chances are only 80% (an indus- try average) that they will be in stock; and there is a good possibility (because of the long order window) that they will never be in stock again. Not to worry, though. There are millions of size nine Wonder Wings in pink available and many more on the way because the order flow, once turned on, cannot be turned off and the replenishment cycle is so long. As a result, the shoe industry fails to get one customer in five the product he or she actually wants, while it remainders 40% of total production (pink Wonder Wings, for example) through secondary channels at much lower revenues.

There will certainly be differences among industries in the difficulty of implementing lean consumption. But even in those where lean provision seems impractical, there are likely to be practical, if counterintuitive, solu- tions. Consider that Nike can now profitably deliver even customized bags overnight anywhere in North America. How? By-of all things-locating manufacturing in Cali- fomia. (See the sidebar "Locating for Lean Provision.")

Whatever the industry, the lean provider's approach has a common theme: pull. Rather than infrequently or- dering large numbers of items based on very sophisticated centralized forecasts (which are almost always wrong), the lean provider puts in place rapid replenishment sys- tems that quickly restock exactly what a customer has just pulled from the shelf. This is not just a warehousing problem. It's a total-system Issue of multiple replenish- ment loops running all the way back to raw materials. These loops permit a business to quickly restock at every level what the next downstream customer actually wants, as shown by what a previous customer just used.

Tesco, a UK-based retailer, is the world leader in apply- ing these principles and is now approaching a level of ser- vice of more than 96%. That's still not good enough to get

MARCH 2005 63

Drawing a ^ Lean Consumption Map

Mapping the steps in a production and

consumption process is the best way

to see opportunities for improvement.

A map can reveal how broken processes

waste providers'and consumers'time and

money.

Here's how Crupo Fernando Simao

(CFS), a Portuguese automobile dealer

group, discovered the inefficiencies In its

processes. First, the company looked at

consumption. It listed the steps a typical

consu mer takes to get a car fixed-from

searching for a repair shop to arriving

home with the vehicle repaired-and the

time required for each. Then CFS drew

boxes representing the eight steps it iden-

tified, sized each box in proportion to the

time needed to complete the correspond-

ing task, and shaded in the value-creating

time. The company also collected data on

the percentage of jobs done right the first

time and on time.

CFS found that these consumption

steps took the average consumer a total of

120 minutes. And, because dealers often

couldn't do repairs on the day they re-

ceived the ear-either because they didn't

have time after diagnosing the problem or

because they lacked necessary parts, tools,

or knowledge-almost half ofthe custom-

ers' time was wasted. What's more, only

60% ofthejobs were completed on time.

Next, CFS mapped the 25 steps in its

provision process, adding arrows to show

where these provision steps interacted

with the steps in the consumption pro-

cess. The group discovered that the provi-

sion steps took 207 minutes of paid time,

only 27% of which created any value for

the customer. A closer look revealed that

technicians, the sole creators of customer

value, were creating value during only

45% of their paid work time. Not impres-

sive. (Seethe exhibit "Car Repair Before

Lean Processes.")

HanRopair Before Lean Processes.

o a.

JSm nule&

1 Seardiforrepairer ^—•

5 m nutas 45 minutes

3 Drive to fadHty

problt'fi ,h.mcl

5 WaTlTor loaner car

TTjuel le ana pay, receive car

l^ivehome

SmlniitH SminutM

1 Answer phone \—*- 2 Book appointment 3 Check in

4 Caftostorage

S Fetch ioaner

6 Pass to workshop

38 mtnul**

7 Pdss lo technician

8 Diagnose problem

14mlnutai 85 mIniitH SlmimitH

12 Pass to service rep.

l J Phone customer, discjss diagnosis

14 Pass to v^orkshop r

9j :heck parts

10 Carlo storage

11 Pass to office

15 Pass to technician

16 Collert parts

ITflepairtai

21 Pass to service rep.

22 Invoice

23 Fetch car

24 Handovercar

-value-creating time

I ^ wasted time

I -j—technician's time

19Carto storage

2 0 Pass to office

HARVARD BUSINESS REVIEW

Using this map, CFS eliminated unnec-

essary steps in both the provision and

consumption processes. The gains for CFS

and its customers become cieariy visible

when we look at how the process works

today (5ee the exhibit "Car Repair After

Lean Processes").

Here, CFS leverages its ongoing rela-

tionship with customers, eliminating the

need for them to search fora new repair

shop because of dissatisfaction with a pre-

vious repair. CFS prediagnosesthe prob-

lem by phone whenever possible and con-

firms the diagnosis as soon as the car

arrives. If customers can wait a few mo-

ments, they can authorize the repair work

right then and avoid the extra phone call.

The dealers have also smoothed the work

flow by carefully scheduling arrivals to

eliminate queues and passing work di-

rectly to the technician, with nohandoffs.

In addition,they have minimized the tech-

nician's time by leveling work flow and

separating jobs according to their com-

plexity and the time required to complete

them. Parts and tools are prei<itted and

delivered to the technician in the service

bay just as needed. And common repair

tasks are standardized to reduce time spent

as well as to increase the chance of get-

ting the work done correctly and on time.

These gains create a win-win situation.

Customers'time is no longer wasted and

CFS can handle a greatervolume of busi-

ness. CFS's technicians are now creating

value during 78% of their work time and

they complete nearly twice as many jobs

per day More jobs are done right the first

time, so fewer cars are brought back for

a second visit. Asa result, CFS requires a

smaller support staff and needs only one-

quarter the number of loaner cars.

01

E

o u

•a

o a.

Car Repair After Lean Processes Time Saved

SmintrtM

BOOK appointment 2 Discuss problem

Sminutai ISminulfli

1 800k appointment |—• 2 Discuss problem, creaK repair pbn

3 Order

5 Walt for disgnosis confirmation, authorize repair

9 Deliver parts

10 foiled Git

11 Repair o r

27% value- creating time 1

5 9 % value- creeling time

Before After lean lean

MARCH 2005 65

Lean Consumption

all customers exactly what they want, but it's a big leap- and proof that lean production principles can support lean consumption.

How does Tesco do it? By replenishing every store con- tinuously, over a 24-hour day, to eliminate the need to hold stock either at the back of the store (as does Wal- Mart) or in high-bay storage (like Home Depot). Tesco re- orders from key suppliers that produce - in a matter of hours-items that have just been purchased. What's more, Tesco picks up directly from suppliers' shipping docks at precise times and takes the goods to regional distribution centers where fresh products and fast-moving items are cross docked onto vehicles delivering to stores. In a fur- ther lean innovation, Tesco satisfies Web-shopping orders by having store personnel fulfill orders from the shelves during lulls. This process has reduced personnel costs, avoided the cost of separate warehouses for Web orders, and made Tesco the world's largest Internet grocer.

Lean techniques have helped Tesco to grow its share rapidly and become the UK's market leader in groceries, fueling its global expansion in Eastern Europe and East Asia as well. They have also allowed the grocer to increase customer satisfaction and loyalty by giving shoppers what

they want (and, as we shall see, by providing it where and when they want it) -without wasting their time.

Provide what's wanted exactly where it's wanted. Conventional wisdom holds that customers usually obtain needed items from a single forniat (the price-conscious suburban shopper goes to Costco or Sam's Club; the time- pressed urban professional goes to Trader Joe's). But the conventional wisdom is wrong. Balancing many consid- erations, chief among them price and convenience, most of us use a variety of formats to get what we want as our circumstances change. We make the occasional trip to Costco for bulk items, the weekly trip to the standard su- permarket for its wide selection of groceries, and several stops at the convenience store for the little things we missed, and we order out for home delivery when time's especially tight or we're just exhausted. By using different formats depending on circumstances, we minimize our total cost of consumption: the sum of prices we pay for products plus the time and effort expended to obtain them. In this equation, typically, price goes up as time and hassle decrease; we pay-sometimes a lot-for convenience.

Imagine, though, a provision process that maximizes convenience while keeping prices nearly uniform across

_v-.y—• Locating for Lean Provision •—•—•—•—•—•—•—

F rom the lean perspective, the stampede to outsource

manufacturing to China in order to serve North Amer-

ican and European customers is questionable, but not for

the reason5 usually cited. The real challenge for lean pro-

viders is the inability of remote production facilities to re-

spond instantly to changing customer demands, such as a

surge in requests for size nine gray "Wonder Wings."

Most manufacturers and their retail partners seem to

have no method for calculating totaf costs ofthe entire

provision stream for their products. These include costs

for parts, actual logistics (not just the cheap container

shipping probably called for in the business plan), stock-

outs, remaindering, and carrying inventory over extended

supply lines. In our experience, when all these costs are

added up to accurately calculate total product costs, the

lowest-cost location for labor-intensive products with

unpredictable demand is often at the lowest wage point

within the region of sate. That means Mexico for North

America, Romania and Turkey for Western Europe, and,

yes, China for japan, because rapid replenishment at rea-

sonable cost is possible from these locations.

For lean thinkers, the general rule is that shipping by

boat is cheap but slow and, when forecasts are wrong,

must be replaced by airfreight that is fast but expensive.

By contrast, trucks are much faster than boats and much

cheaper than planes. They permit overnight replenish-

ment through each ofthe loops in atypical provision

stream, provided that production is within the geographic

region of sale. Ifyou can'teliminatecostly activities within

production processes, you may still need to relocate to

low-wage countries-but do it in a way that minimizes

total costs.

In the case of products that are made to order, it might

make sense to move manufacturing closer still to the cus-

tomer, even when that's not the lowest wage point in the

region. Consider Nike's surprising approach to the low-

cost manufacture of customized goods. On Nike's Web

site,you can customize a bag or backpack, choosing from

a variety of fabrics and colors for the bag's panels, and

even have Nike embroider a monogram or personal mes-

sage on the item you order. And your customized bag will

cost only $10 more (including express shipping) than a

standard version in a retail store.

What you wouldn't have known is that your bag will

be manufactured to your precise order at NuSewCo, a

small contractor in the San Francisco area. At $15 per

hour, NuSewCo's labor costs are 20 times higher than the

fully loaded labor costs of the contractors in China that

make Nike's other products. But Nike calculates that the

total expense of obtaining its customized bags using high-

priced American labor and offering express delivery is

lower than the total cost of sourcing its standard bags for

66 HARVARD BUSINESS REVIEW

Lean Consumption

formats and preserving retailers' margins. In fact, this is possible if one fulfillment channel can supply every for- mat. That's because the cost to the provider of the prod- ucts entering its channel from suppliers depends pre- dominantly on the buying power ofthe channel operator rather than on scale economies in larger bulk orders or scale advantages in larger stores.

For instance, the reason Wal-Mart sells hammers more cheaply than the comer hardware store isn't that the scale of Wal-Mart's order reduces hammer production costs or that the store's size significantly reduces its costs. It's be- cause the scale of Wal-Mart's order causes the hammer maker to accept a low selling price in return for volume, and Wal-Mart passes on this savings to its customers.

The opportunity is ripe for large retailers using lean lo- gistics techniques to offer a complete range of formats with uniform pricing to serve every customer need. Tesco is already doing this. It has created a full complement of formats ranging from local convenience stores (Tesco Ex- press), to midsize stores in town centers (Tesco Metro), to standard-size supermarkets in the suburbs (Tesco Super- store), to hypermarkets on the periphery (Tesco Extra), to Web-based shopping (Tesco.com). By integrating the ful-

American customers from SoutheastAsia and selling

them through retail.

How can this be? It's possible because sourcing locally

and manufacturing only to order permits Nike to leave

out a large number of steps in the logistics and sales pro-

cesses: The storage of items at the plant in Southeast Asia

until there is a full container to take to the port. The fur-

ther storage ofthe container at the port while shipping

awaits a full load forthe container ship. The customs pro-

cesses on both ends. The storage ofthe items in the distri-

bution center on the U.S. West Coast and the assembly

into containers to send to the stores. The ent/re cost ofthe

store. The cost ofthe inevitable overstocks. The cost of

lost sales due to stock-outs. And the cost of remaindering

(which sometimes simply means discarding) the items

produced on forecast for those customers who never

materialized.

As Nike's cost analysis shows, the touch labor is actu-

ally a small portion ofthe total cost of producing and

delivering these products.despite their tabor intensity.

Most ofthe costs reside in the various overheads at Nike,

the management ofthe many handoffs from production

sources on the other side ofthe world, the large invento-

ries at many points, the retail dealers'overheads, the lost

sales from too few goods, and the lost pricing power from

too many.

fillment channel behind all these formats, Tesco is an- swering an expanded array of consumption needs.

One result of this efficient channel sharing is that Tesco seems to be the only grocer making money on Web-based grocery shopping while continually increasing sales vol- ume. Another, more provocative consequence is that all of the goods entering this unified fulfillment channel bene- fit from the same purchasing power: The tube of tooth- paste going to the tiny Tesco Express outlet costs Tesco the same amount to buy from the supplier as the tube going to the vast Tesco Extra store, and the fulfillment cost is very nearly the same as well. This strongly suggests that the age of mass consumption retailing, in which the in- dustry keeps heading toward ever larger fonnats, is com- ing to an end. Why drive miles to a "big box" if the items you want are available nearby from a smaller format at the same prices?

Perhaps the biggest benefit Tesco gains from this ap- proach is that its customers are no longer strangers. By of- fering loyalty cards that are accepted at all formats, Tesco has begun to harvest invaluable data about the entire purchasing pattern ofthe 12 million UK customers in its loyalty program, who account for 80% of Tesco's sales rev- enue. This information is now being used to put the right items in the right stores and to target the right customers with the right promotional offers.

With Tesco's multiple-format model, customers can get what they want where they want it, and at a nearly uni- form price; and the retailer captures additional consumer spending-and loyalty.

Provide what's wanted where it's wanted exactly when if s wanted. Most consumers have been trained to believe that goods and services are purchased on impulse. And for small items~the latest DVD release, for example- this may be true. When we want them is right now. How- ever, for most items-and in particular for major durable goods, which account for the bulk of our spending-most of us continually plan ahead. We still want the goods when we want them, but that date is often some ways off.

Think about your household vehicles. Do you suddenly decide to buy a new car while driving past a dealer? Prob- ably not. But you probably are contemplating a future purchase even as you read this: You know that you can trade your boring van for a two-door roadster as soon as you haul the youngest child to college next fall, and the SUV will reach a point of questionable reliability by the end of next summer.

Imagine that you could get a customized product for a reduced price simply by sharing your plans with a pro- ducer and ordering in advance. This purchasing model already works well for services such as vacation cruises, where advance ticket purchases are not only cheaper but can guarantee a preferred (in a sense,"customized") room. And it could work for consumer goods and a broad range of services - if producers would only listen to you.

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Lean Consumption

But most current interactions actually penalize the cus- tomer for planning ahead. For example, if you ask to spe- cial order a specific vehicle for delivery sometime in the future, the dealer wilt be frustrated that you don't want one of the vehicles already in inventory and v\nll try to steer you to available stock through price discounts. And if you insist on ordering ahead, you will pay a penalty when the dealer refuses to budge on price. This situation is bad for both consumers and producers. It thwarts cus- tomers' desire to get exactly what they want when they want it, and it increases the producers' production and distribution costs. Producers incur these extra expenses because they can't accurately predict the total volume of

your computation and communication problems by eval- uating your specific needs and then determining the best equipment, software, and services? The provider could then obtain, install, maintain, upgrade, and replace the re- quired items for a standard fee, with no unpaid work or hassle for you. And why can't another solution provider put the vehicles in your driveway, then maintain, repair, and dispose of them as appropriate, for a simple usage fee, without consuming any of your time or attention?

Few such solutions are currently being offered cost ef- fectively for consumers' small number of really big prob- lems: mobility, communication, shelter, health care, fi- nancial management, and shopping. (Concierge services

The age of mass consumption retailing, in which the industry keeps heading toward ever larger formats, is coming to an end.

products that will be wanted at a specific time or the mix of features each customer will seek. As a result, they must keep extra production capacity available, keep large in- ventories of finished units and parts on hand, or both.

Most of us do plan ahead for large, durable purchases and would be willing to share our plans with the pro- ducer in return for getting exactly what we want at a fu- ture date with a discount. And those who absolutely must have a specific product (standard shift, purple paint) right now are usually willing to pay a premium for it. If pro- ducers can find a way to share the gains witb their retail- ers, it should be possible to presell a large fraction of prod- ucts to customers' specifications (at a lower cost and price) while keeping the capability to build customized products (at a higher cost and price) right away for the "got to have it now" customer.

A major challenge to "when it's wanted" consumption is that in complex, multifirm provision streams, the inter- ests of the customer, the retailer, the producer, and the suppliers must be aligned. This brings us to the final prin- ciple of lean consumption.

Continually aggregate solutions to reduce the cus- tomer's time and hassle. With our background in lean production, we are repeatedly struck by a phenomenon most business analysts seem to miss: Consumers are using more and more suppliers-frequently strangers reached through impersonal markets-to solve smaller and smaller problems, often on a onetime basis. By contrast, lean pro- ducers, following Toyota's example, are steadily reducing their supply base for each item and asking fewer suppli- ers with deeper knowledge of their needs to solve bigger problems on a continuing basis.

This same concept can be applied to the process of con- sumption. For example, why can't a single provider solve

and consumer advocates may be available, but are actu- ally a step backward into a world where the well-to-do hire staff to cure their consumption headaches, which are caused by broken processes.)

However, advances in information technology - for managing providers' logistics and connecting consumers and providers-will lift the technical barriers to solving these problems and make solutions cost effective. And transparent pricing of bundled goods and services, along with clear rules governing how providers use consumers' information, will be essential. Finally, providers and con- sumers will have to truly open lines of communication and learn how to plan together over the long term.

Making Lean Consumption Work We believe that consumers wili be quick to learn their role in lean consumption. Most of us would surely em- brace the opportunity to solve our consumption prob- lems completely, getting just what we want, when we want it, where we want it, at an attractive price from a small number of stable providers, with no waste of our time, and with no unpaid work.

The real challenge lies with the retailers, service pro- viders, manufacturers, and suppliers that are not used to looking at total cost from the standpoint ofthe consumer and are even less accustomed to working with customers to optimize the process of consuming. Lean production has clearly triumphed over similar obstacles in recent years to become the dominant global model. Can lean con- stunption, its logical companion, be far behind? 9

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68 HARVARD BUSINESS REVIEW