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Lean Business Practices: An Introduction

Furniture World Magazine
Volume 145 NO.4 July/August


on


You will never guess
how I can tell at a glance
if a retail store is generally well run and their people are effective.

It’s kind of funny, actually. Just by walking around and casually observing how people are acting and reacting, it’s easy to tell where operational challenges exist.

Overall, when a home furnishings operation gives the impression that everything is under control, the business is likely to be operationally organized. Where there is a sense of chaos, there are likely to be challenging operational issues.

Signs Of ABusiness In-Control

  • Office people who are quietly going about their work without interruption
  • Warehouse crews that are moving at a steady pace in a tidy environment.
  • Smiling salespeople, excited shoppers.On-time management meetings.
  • In-control telephone conversations.
  • The absence of in-service merchandise.
  • Bright eyed and well-spoken employees.
  • Tidy desks, clean bathrooms, clean break-rooms, well-kept showrooms.

Signs Of A Business In-Chaos

  • Office people who are continually interrupted and forced to over multi-task.
  • Too many people in the warehouse either rushing around or sitting around.
  • Tired salespeople.
  • Frustrated shoppers.
  • Unfocused management meetings, constantly being interrupted by the telephone.
  • Ballooning service issues.
  • Arguments, messy surroundings.
  • Excess overtime.
  • Lack of proper merchandising.
  • Lots of people doing lots of work.

Given two operations of equal sales size, those businesses that are in-control will obviously outperform their counterparts in-chaos. They outperform in terms of profitability, cash position, workplace environment, customer experience and future sales growth potential. They outperform because they are more effective and focused on doing their work properly.

In-control stores are LEAN

LEAN is a practice of continually evaluating and improving a business. In doing so, value-added activities are supported and waste is eliminated. Similar to other practices such as Kaizen, its roots come from Japan and Toyota. Toyota executed techniques that allowed it to become a dominant force in the world car market. These techniques have since been adapted, modified and adopted by countless organizations. My goal with this series of articles is to create some LEAN techniques that are specific to your B2C (Business to Consumer) environment.

Definition of LEAN

LEAN is the art and science of continuously examining and improving a business’s processes, people and products so that the customer experience is overwhelmingly positive, allowing the business to realize its potential.
LEAN is 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.

80/20 Thinking

It is important to subscribe to the notion of 80/20 thinking when implementing LEAN. Also called the Pareto Principal, 80/20 thinking says that a minority of inputs produce the majority of outputs. One of the keys to making a LEAN strategy work is using what works - focusing on knowing what does not work - then improving or eliminating the later. Examples in business are:
  • The minority of customers (i.e. 20%) produce the majority of revenue (i.e. 80%).
  • The minority of salespeople generate the majority of sales.
  • The minority of inventory items produce the majority of gross margin dollars.
  • The minority or workers perform the majority of work.
  • The minority of marketing produce the majority of results.
  • The majority of problems come from the minority of areas.

Implementing LEAN

Below is my general strategy for implementing LEAN. Subsequent articles in this series will present a LEAN strategy for parts of an organization.
  • Establish benchmarks based on performance metrics.
  • Measure performance using 80/20 thinking.
  • Find solutions.
  • Execute to conclusion.
  • Continue improving.

Establish benchmarks based on performance metrics

Every furniture business should have benchmarks that it is constantly looking to improve. Each department should also set its own benchmarks and improvement strategies. A benchmark should make sound business sense and allow for an executable strategy to be formed to improve it. For this reason, the performance metric chosen to benchmark off of is required. A performance metric is an operational ratio that gauges improvement.
One example of a good LEAN metric to benchmark is Gross Margin Return on Inventory (GMROI). This is because it measures two values that directly affect desired results: Gross Margin and Inventory. Benchmarking either Gross Margin or Inventory solely on their own will not give a full picture. I’ve seen companies with $2 Million in inventory either be hugely profitable or go bankrupt. The Gross Margin dollars produced in relation to that Inventory is the key. A good metric to benchmark off of helps an organization consistently measure itself, focus on results and execute a LEAN strategy.

“LEAN is about
developing an organization. It is NOT about making broad cuts in expenses or people.”


Measure performance using 80/20 thinking

A LEAN strategy requires constant measurement of performance. This is where the 80/20 Principal comes into play.

Suppose you are measuring GMROI. If inventory was $2 Million and Gross Margin produced is $4 Million, the GMROI is $2.00. You know where you are overall. However, realize that there are a minority of factors that pull up your performance averages and a majority of factors that pull you down.

Using 80/20 thinking, you can identify which factors to maintain and which to improve or remove. A LEAN strategy uses 80/20 principals to separate top performing areas from weaker ones. For example, you might find that 4 of 20 vendors are producing the majority of your return. First, know what is important to track. Then you can understand what elements within it are producing or reducing.

Find Solutions

This is the strategic and tactical part of LEAN. Strategy involves big-picture goal setting and sets the direction of the business to improve performance. Tactics define the specific actions that must be undertaken day-in and day-out for the strategy to be achieved. For example, if a business decides that GMROI is a primary metric to benchmark and measures the result at $2.00, it may set this strategy: Achieve a $2.5 GMROI by transferring inventory investment into its most profitable vendors and from its under-performing vendors.

Good strategy, right?

There is more to it than that. Strategy alone does not produce results. With LEAN solutions, defining the specific tactics to be performed in “the trenches” are required. For this example, tactics may be:
  • Increase stock of best-selling items in Vendor X.
  • Source a quick-shipping vendor with extended terms that can capture a better margin to replace Vendor Y.
  • Decommission small capacity delivery resources in favor of fewer higher capacity resources.

Execute to conclusion

Expect results. If you are benchmarking and measuring a worthy metric and have a solid strategy with people who can execute on time and on budget, you will get results. Some say that execution is the art of getting things done. Ensure that your management team has the right people in place and that they, themselves, can execute your strategy and perform specific daily actions so your desired conclusion is realized.

“A minority

of factors pull up your performance averages and a majority of factors pull you down.”


Execution involves regular training, monitoring of progress, improvements in processes and systems. For example, if you wish to improve your GMROI by speeding up your supply chain in Vendor X, you may need to invest resources in systems and training to make that possible.

LEAN is not about trimming overall expenses. LEAN is about better allocating resources. Many times increasing expenses to become better is required to execute a LEAN strategy to conclusion.

Continue Improving

Guess what? Once you achieve your improvement goals your LEAN journey is just beginning! This may seem tiring. Yes, and, it is a fun and a necessary part of long-term success. LEAN is about never-ending improvements. For example, if you reach your goal of $2.5 GMROI, it’s time to “up the bar” or focus on improving another business metric. Then the whole strategic LEAN cycle begins again. Continue to navigate the ups and downs. Enjoy your continual journey of success.

Similarly, this is just the beginning of this series on LEAN. Future installments will provide details about executing a LEAN strategy in the various operational departments including: LEAN Marketing, LEAN Sales floor, LEAN Merchandising, LEAN Warehousing, LEAN Delivery, LEAN Service, LEAN Office, and LEAN Management.

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