About the Author
James P. Womack is the president and founder of the Lean Enterprise Institute (www.lean.org), a nonprofit education and research organization based in Brookline, Massachusetts.
Daniel T. Jones is the chairman and founder of the Lean Enterprise Academy (www.leanuk.org), a nonprofit education and research organization based in the UK.
Excerpt. © Reprinted by permission. All rights reserved.
Chapter 1
Value
A House or a Hassle-Free Experience?
Doyle Wilson of Austin, Texas, had been building homes for fifteen years before he got serious about quality. "In October of 1991 I just got disgusted. Such a large part of my business was waiting and rework, with expensive warranty claims and friction with customers, that I knew there must be a better way. Then I stumbled across the quality movement."
He read Carl Sewell's book on car dealing, Customers for Life, and decided to test his claims by buying a car at Sewell's Dallas dealership. ("I thought that if even a car dealer could make a customer feel good, it should be easy for a homebuilder!") His purchase was such a positive experience that he asked Sewell for advice on quality in home building and was told to read the works of W. Edwards Deming.
Doyle Wilson is the archetypical Texan and never does things halfway. By February of 1992 he had launched a wall-to-wall Total Quality Management campaign at Doyle Wilson Homebuilder. Over the next three years he personally taught his workforce the principles of TQM, began to collect and analyze enormous amounts of data on every aspect of his business, got rid of individual sales commissions ("which destroy quality consciousness"), eliminated the traditional "builder bonus" for his construction superintendents (who were qualifying for the "on-time completion" bonus by making side deals with customers on a "to-be-done-later" list), reduced his contractor corps by two thirds, and required the remaining contractors to attend (and pay for) his monthly quality seminars.
Customer surveys showed a steady rise in satisfaction with the homebuilding experience and sales grew steadily even in a fiat market as Wilson took sales from his competitors. In 1995, Doyle Wilson Homebuilder won the National Housing Quality Award (often called the Baldrige Award for quality of the construction industry), and Wilson set a goal of winning the Baldrige Award itself by 1998. Yet he was not satisfied.
"I knew I was making progress in competing with other builders for the new-home buyer, but a simple fact, once it lodged in my mind, wouldn't go away: 78 percent of the homes bought in central Texas each year are 'used' or older homes. I've been making progress in increasing my share of the 22 percent seeking a new home, but what about the 78 percent who bought older homes? Obviously, these buyers are the real market opportunity."
So instead of surveying people who were buying new homes, Wilson began to talk with people who were buying older homes. What he discovered was obvious in retrospect but has required a complete rethinking of his business. Specifically, he found that many buyers of older homes hated the "hassle factor" in negotiating for new construction, the long lead times to get the job done and move in, the inevitable "to-be-done" list after moving in, and the "phony choices" available from builders who promise custom homes but then load on as "standard equipment" many features of little interest to buyers.
Wilson soon realized that that was exactly what he had been asking his customers to go through. By contrast, older-home customers could clearly see what they were getting, buy only what they wanted, and, often, move in immediately. "No wonder I was losing 78 percent of my potential customers!"
To create a hassle-free experience to go with the house itself (these together constituting Wilson's "product"), it was necessary to rethink every step in the process. He has recently opened a one-stop sales center where the customer can see and decide on every option available in a house (for example, the forty different varieties of brick, the three thousand varieties of wallpaper, the four styles of built-in home office), customize a basic design with the help of an Auto-Cad computer system, select features beyond the standard level (for example, extra-thick carpet pads, additional outdoor lighting, and heavier-duty wiring), determine the exact price, work out the mortgage, arrange for insurance, and arrange for the title search. For customers truly in a hurry this can be done during one walk-through of the sales center.
To shrink the lead time from contract signing to moving in from six months to a target of thirty days, he has reorganized his contract-writing and job-release process and is developing a system of pull scheduling for contractors who are assigned new jobs as downstream jobs are completed.
He is also introducing standardized work statements, parts lists, and tool kits for every job. Eventually these steps will eliminate the "to-do" list because the new system does not allow the next task to start until the previous task is certified as complete with perfect quality.
Finally, Wilson has created a wide range of basic house designs with a minimum construction standard and asks the customer to specify all materials and systems upgrades (using the computer design system) to a selected base design so the customer only pays for exactly what she or he feels is really needed.
Doing all of this will not be easy, as we'll see when we return to this example in Chapter 3 on fiow, but Doyle Wilson has already made the key leap. Instead of concentrating on conventional markets and what he and his contractors were accustomed to making in a conventional way, he has looked hard at value as defined by his customers and set off down a new path.
Start by Challenging Traditional Definitions of "Value"
Why is it so hard to start at the right place, to correctly define value? Partly because most producers want to make what they are already making and partly because many customers only know how to ask for some variant of what they are already getting. They simply start in the wrong place and end up at the wrong destination. Then, when providers or customers do decide to rethink value, they often fall back on simple formulas -- lower cost, increased product variety through customization, instant delivery -- rather than jointly analyzing value and challenging old definitions to see what's really needed.
Steve Maynard, vice president for engineering and product development at the Wiremold Company in West Hartford, Connecticut, was trying to deal with these very problems when he reorganized Wiremold's product development system in 1992. For many years previously, Wiremold had developed new products -- consisting of wire guides for office and industrial users and surge protectors for PCs and other business electronics -- through a conventional departmentalized process. It started with marketing, which commissioned surveys comparing Wiremold's products with the offerings of competitors. When an "opportunity" was identified, usually a gap in the market or a reported weakness in a competitor's offering, a design was developed by product engineering, then tested by the prototype group. If it worked according to specification, the design proceeded to the engineers designing the machines to make the products and eventually went into production.
This system produced designs which lacked imagination and which customers often ignored. (The designs also took too much time and effort to develop and cost too much to make, but these are a different type of problem we'll discuss in Chapter 3.) Simply speeding up this process through simultaneous engineering and then broadening product variety would just have brought more bad designs to market faster. Pure muda.
Steve Maynard's solution was to form a team for each product to stick with that product during its entire production life. This team -- consisting of a marketer, a product engineer, and a tooling/process engineer -- proceeded to enter into a dialogue with leading customers (major contractors) in which all of the old products and solutions were ignored. Instead, the customer and the producer (Wiremold) focused on the value the customer really needed.
For example, traditional Wiremold wire guides (which channel wiring through hostile factory environments and provide complex arrays of outlets in high-use areas like laboratories and hospitals) had been designed almost entirely with regard to their ruggedness, safety, and cost per foot as delivered to the construction site. This approach nicely matched the mentality of Wiremold's product engineers, who dominated the development process and who found a narrow, "specification" focus very reassuring.
As the new dialogue began, it quickly developed that what customers also wanted was a product that "looked nice" and could be installed at the construction site very quickly. (Wiremold had never employed a stylist and knew relatively little about trends in the construction process.) Customers were willing to make substantial trades on cost per foot to get better appearance (which increased the bid price of construction jobs) and quicker installation (which reduced total cost).
Within two years, as all of Wiremold's product families were given the team treatment, sales for these very conventional products increased by more than 40 percent and gross margins soared. Starting over with a joint customer-producer dialogue on value paid a major dividend for Wiremold quite aside from savings in product development and production costs.
While Wiremold and Doyle Wilson Homebuilder and every other firm needs to be searching for fundamentally new capabilities that will permit them to create value in unimagined dimensions, most firms can substantially boost sales immediately if they find a mechanism for rethinking the value of their core products to their customers.
Define Value in Terms of the Whole Product
Another reason firms find it hard to get value right is that while value creation often fiows through many firms, each one tends to define value in a different way to suit its own needs. When these differing definitions are added up, they often don't add up. Let's take another nightmarish (but completely typical) travel example.
One of us (Jones) recently took his family on an Easter holiday in Crete from his home in Herefordshire in the United Kingdom. What was wanted was a total, hassle-free package of transport to the airport, a fiight to Crete, transport to the villa in Crete, and the villa itself. What was available instead was a product pieced together by the user and involving nineteen different operating organizations:
The travel company (to book the air tickets and the villa), the taxi firm (which doesn't deal with the travel company) handling the long trip from Hereford to London Gatwick -- no airline fiies nonstop between Birmingham (the nearest airport) and Crete at Easter time, the ground staffs at both airports (independent contractors to the airline), the security staffs at both airports (more independent contractors), the two customs staffs (to check your documents at both ends and to keep themselves occupied doing so), the two airport authorities (who love long layovers because spending per passenger goes up), the airline (which has been deintegrating and performs less of the support activities for its operations itself), the air-traffic authorities in five countries along the route of fiight (who follow the standard form for governments by being undercapitalized and optimized for delays), the bank exchanging currency at Gatwick airport, the bus company to convey the family to the villa in Crete, and the villa.
The trip was reasonably routine but look at what the Jones family did to "process" itself through the system:
1. Call the travel company to make the booking.
2. Receive the tickets by mail.
3. Call the taxi company to make the booking.
4. Wait for the taxi.
5. Load the luggage (8:00 A.M. GMT).
6. Drive to the airport (three and a quarter hours), arriving two hours before the scheduled fiight time as required by the airline.
7. Unload the luggage.
8. Wait in the currency exchange queue (to change English pounds into Greek drachma).
9. Wait in the check-in line.
10. Wait in the security line.
11. Wait in the customs line.
12. Wait in the departure lounge.
13. Wait in the boarding line.
14. Wait in the airplane (two-hour air-traffic delay).
15. Taxi to the runway.
16. Fly to Crete (three hours).
17. Wait in the airplane (taxi and deboarding).
18. Wait in the baggage-claim line.
19. Wait in the immigration line.
21. Wait in the customs line.
22. Load luggage onto the bus.
23. Wait in the bus.
24. Travel by bus to the villa (almost forty-five minutes).
25. Unload luggage and carry to villa.
26. Wait to check in at the villa (9:00 P.M. GMT).
The box score:
Total travel time: 13 hours
Time actually going somewhere: 7 hours (54 percent of the total) 3
Queuing and wait time: 6 hours
Number of lines: 10
Number of times luggage was picked up and put down: 7
Number of inspections (all asking the same questions): 8
Total processing steps: 23
The problem here is not that there were too many firms involved. Each was appropriately specialized for its current task. The problem instead is that each firm was providing a partial product, often only looking inward toward its own operational "efficiency" while no one was looking at the whole product through the eyes of the customer. The minute the focus is shifted to the whole as seen by the customer, obvious questions emerge:
Could one person at check-in handle the security, customs, and check-in tasks? (Letting you walk past them into the boarding area or even onto the plane.) Better yet, could the ticket sent by your travel agent include your baggage tags, boarding passes, taxi voucher, bus tickets, and villa registration, so you just drop these off as you walk through each point? (Or perhaps travelers could create their own ticket using their personal computer linked to reservations systems. They could simply swipe their credit card through a card reader at each point, eliminating paperwork altogether along with the travel agent.) Could the customs authorities in Crete have your passport scanned at check-in in London and use the hours you are en route to figure out whether you ought to be admitted? (Then, unless there is a problem, you could just walk off the plane without visiting immigration and customs at all.) And why (does anyone know?) do you need to arrive at the airport two hours before departure? In short, the appropriate definition of the product changes as soon as you begin to look at the whole through the eyes of the customer.
The Critical Need for Lean Firms to Rethink Value
If you take a few moments to refiect on almost any "product" -- a good, a service, or more likely both in combination -- you will begin to see the same issue of the appropriate way to define it. Doing this will generally require producers to talk to customers in new ways and for the many firms along a value stream to talk to each other in new ways. (We'll see many more examples of this need in the pages ahead -- for example, the need for car companies to stop selling a product and car dealers to stop selling services, both to be replaced by a new product [personal mobility] provided jointly to the user.)
It's vital that producers accept the challenge of redefinition, because this is often the key to finding more customers, and the ability to find more customers and sales very quickly is critical to the success of lean thinking.
This is because lean organizations, as we will demonstrate shortly, are always freeing up substantial amounts of resources. If they are to defend their employees and find the best economic use for their assets as they strike out on a new path, they need to find more sales right now. Beginning with a better specification of value can often provide the means.
Then, once the initial rethinking of value is done (in what might be called kaikaku for value), lean enterprises must continually revisit the value question with their product teams to ask if they have really got the best answer. This is the value specification analog of kaizen which seeks to continually improve product development, order-taking, and production activities. It produces steady results along the path to perfection.
The Final Element in Value Definition: The Target Cost
The most important task in specifying value, once the product is defined, is to determine a target cost based on the amount of resources and effort required to make a product of given specification and capabilities if all the currently visible muda were removed from the process. Doing this is the key to squeezing out the waste.
Conventional firms set target selling prices based on what they believe the market will bear. They then work backwards to determine acceptable costs to ensure an adequate profit margin, and they must do this any time they begin to develop a new product. So what's different here? Lean enterprises look at the current bundles of pricing and features being offered customers by conventional firms and then ask how much cost they can take out by full application of lean methods. They effectively ask, What is the muda-free cost of this product, once unnecessary steps are removed and value is made to fiow? This becomes the target cost for the development, order-taking, and production activities necessary for this product.
Because the target is certain to be far below the costs borne by competitors, the lean enterprise has choices: reduce prices (another way to increase sales volume and utilize freed-up resources); add features or capabilities to the product (which should also increase sales); add services to the physical product to create additional value (and jobs); expand the distribution and service network (again increasing sales, although with a time lag); or take profits to underwrite new products (which will increase sales in the longer term).
Once the target cost is set for a specific product, it becomes the lens for examining every step in the value stream for product development, order-taking, and production (this latter being called operations in the case of a service like insurance or transportation). As we will see in the next chapter, the relentless scrutiny of every activity along the value stream -- that is, asking whether a specific activity really creates any value for the customer -- becomes the key to meeting the aggressive cost target.
Copyright © 1996, 2003 by James Womack and Daniel Jones
