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Lean Techniques Part 5: Case Study

Furniture World Magazine

Volume 146 NO.2 March/April

In the fifth installment on LEAN retailing, we look at how LEAN techniques took one retailer from losing money to more than 10% profit.

LEAN Operations is the 5th article in our series on LEAN retailing. The previous four articles can be found on the furninfo.com site at www.furninfo.com/Authors/DavidMcMahon/6. As a reminder, the definition of LEAN is:

LEAN is the art and science of continuously examining and improving a business’s processes, people and products so that the customer experience flourishes allowing the business to realize its potential.
As has been mentioned previously, LEAN is not about developing an organization. It is NOT about making broad cuts in expenses or people. It is about making cuts in areas of organizational waste so that business productivity accelerates.

The concept of LEAN and how to use it with respect to improving Sales, Marketing and Inventory performance have all been covered in recent issues. Here, this information will be used to show how to use LEAN to identify opportunities and produce better results within your daily retail operations. To do this, let’s consider the case of retailer “XYZ Furniture” that went from constantly being in debt and losing money to becoming debt free and showing profits of over 10% bottom-line. This is the true story of a retailer that joined a performance group I facilitate. XYX Furniture had little profitability over the five years previous to joining the group. In fact, their best year had been a 3% bottom-line. This is what their net income looked like from 2006-2010:

XYZ had increased their long-term debt load and pushed out their payables to survive. They were living off a line of credit and credit cards. Obviously, there was little cash available to reward the owners or their employees. XYZ was an unhappy organization.

This lackluster performance of this retailer located in middle-America was not due to the housing crisis that lead to the Great Recession. Sales were constant through the 2006-2010 period, so volume was not to blame.

By 2010 XYZ Furniture’s management decided to commit to turning their business around. Here are the LEAN techniques used to accomplish this feat.

Establish Benchmarks & FIND the GAPS

First, XYZ Furniture’s operational statistics were compared to other retailers in the performance group, as well as to known data from the industry at large. These stats are summarized in Figure #1 below. The gaps are tabulated in the far right column. These gaps showed where there were opportunities for improvement at XYZ Furniture. 

From this summary gap analysis, it’s clear that XYZ had fallen behind in several areas of their operation:  

  • Inventory management and sales of product were trailing. The Gross margin being achieved on pricing and selling strategies was 4% behind the group.

  • General administration expenses of overhead, accounting and office were 2% greater.

  • Selling Commissions and management of the salesforce were 1% greater.

  • Customer service expenses less vendor charge back and credit income were .5% greater.

  • Warehousing, staffing, equipment and facilities were 1.5% greater.

  • Delivery costs less delivery income were 1% greater.

Overall, XYZ’s operations were 8.5% more costly. This opened the owner’s eyes to their massive opportunity. The first step with any improvement is realization through education. The next step is commitment to action.

80/20 Thinking & Trimming The Fat

Trimming the fat with a proper LEAN strategy does not mean slashing all costs. It means getting the microscope and the paring knife out. This is the process of finding the resources that are producing benefits (tangible or intangible), finding resources that are detracting, and then moving resources out of the detractors and into the producers.

The retailer in this story did this by employing 80/20 analysis. Here is what was discovered:

• Approximately 20% of items produced 80% of margin dollars. When looking at these items in detail, their individual gross margins ranged from 43% to 47%.

• Most of the day to day administrative tasks were being handled by a couple of employees. This caused some people to be over worked and ineffective, and others to be under-worked and inefficient.

• A minority of salespeople wrote the majority of business. A few of the top writing salespeople had the lowest margins.

• Most customer service issues came from a few vendors.

• The majority of deliveries happened at the end of the month. This caused under capacity in resources at the start of the month and over capacity at the end.

Finding Solutions

Here are some of the policies they set in motion:

1. A new pricing review structure was put into place for best sellers, special order and new untested merchandise. The review focused on continually pushing the upper margin limits of what HOT items could fetch.

2. Administrative tasks were streamlined. The effective employees were given a “work-buffer” and assigned the proper amount of work at the proper time. Inefficient employees were retrained and reduced. The salary per employee as a result was increased due to fewer people functioning better.

3. Salespeople were placed on a variable commission schedule based on gross margin percent. So, in effect those that could sell at a higher gross margin got a raise, and those that could not got a reduction.

4. Products, with constant credit issues, were removed and replaced. Service issues declined.
  
5. Delivery scheduling was moved to a coordinator who was incentivized on weekly delivered sales volume and full trucks. This resulted in less overtime, faster turns and fewer resources needed to fulfill customer needs.

5. The latest technology tools and training were deployed. This was critical to helping the various parts of the operation work in sync together day-in-day-out.

Execute to conclusion

With any plan, execution is what matters. This business did not always succeed right away in improving the execution of the above solutions. They did, however, persist. They did not take their eyes off the prize. They mandated success. It took time. Some things were achieved faster than others. But in the end they became one of the highest producers in the performance group. More recent metrics for the operational departments at XYZ Furniture are summarized in Figure #2 above.
Continue Improving.

Keep Moving Forward

The improvements that this company implemented in operations translated to greater sales volume at a higher gross margin and forced fixed expenses down. Overall operating costs decreased and fell under 40% for both this company and our performance group as a whole.

There were obstacles along the way. However, they recognize that on any road to success, if there were no road blocks, everyone would be traveling on it. When a new challenge presented itself they would follow a LEAN strategy. LEAN is a never-ending road of self-evaluation, solving challenges and producing results. Winning is a constant pursuit.

David McMahon is a Certified Management Accountant and Consultant with PROFITconsulting, a Division of PROFITsystems. Questions about this article, or to request a similar analysis on your financial statements contact him at Davidm@furninfo.com or call 8oo-888-5565.

Read other articles by David McMahon