This article will suggest that the benefits from applying lean to distributor operations may be far smaller than the gains achieved in manufacturing.  However, many of the concepts can be quite powerful when applied to a more critical function: sales.  To see why, it helps to understand what lean really means and why it became so popular.   
 

The Lean Answer for Manufacturing  

The story begins with just-in-time (JIT) inventory management.  Distributors in most industries are intimately familiar with JIT, in the same way that Dorothy and Toto are acquainted with tornados.  JIT was a reaction by manufacturers to the excess inventory levels created by their antiquated mass production techniques.  It’s important to recognize that mass production, with its large batch sizes and economies of scale, was the dominant ideology for most of the 20^th century.    

JIT focused on reducing inventory “waste” by decreasing batch sizes and using pull techniques (Kanban cards and the like) to control production rather than building to a forecast.  It proved to be a powerful weapon, as US manufacturers reduced their work-in-process inventory from a average of 23 days of sales in 1981 to 9 days in 2000 (Chen, Frank and Wu, 2003).  This spectacular success led many to extend JIT concepts and tools beyond simple workstation inventory control.  From its humble factory floor origins, JIT began to be aimed at waste in all aspects of the manufacturing operation: production steps, material requirements planning, quality, and even vendor relations.   

Industry experts call the original, limited application “little JIT” and the expanded usage “big JIT” or “lean production” (Chase 2004).   

The most important instrument in the lean tool box is value stream mapping.  This is an exercise in which all processes, from product design through procurement, manufacturing and delivery to the customer, are diagrammed.  The purpose is to identify and eliminate steps in material flow or information flow that fail to “add value.”  Ultimately, of course, customers alone determine whether a step is value additive or not.  Although lean practitioners insist that the whole thing is driven by internal and external customers, getting specific about their needs is not the methodology’s strength.  In a way, this is reasonable for a discipline that focuses on manufacturing.  Customer requirements for mass produced widgets are generally pretty obvious: they want products with “zero defects”, which have “100% conformance with specifications.”   
 

The Hammer in Search of a Nail 

This short history lesson hints at some of the limitations of applying lean to distributor operations.  For a start, distributors have never ignored inventory in the way that manufacturers did for most of the past century.  Their core business is buying and selling, so considerations like turns, carrying cost and dead stock have always been at the center of their world.  Even in the primitive days before computerized inventory management, distributors used line points and order points to manage their stock – a simple form of Kanban replenishment that explicitly considers the tradeoff between inventory holding cost and purchasing cost.  There is no distribution equivalent to the low hanging fruit of excess inventory from mass production.   

Unlike manufacturers, distributors’ labor is typically not included in the cost of goods sold.  This means that below-the-line labor expenses are the only financial opportunity for productivity gains.  Excluding the sales force, distributors’ total payroll expenses are generally less than 10% of revenue, and often as low as 5%.  While manufacturers try to get lean, distributors are already downright anorexic!   

The biggest limitation, though, is in the underlying lean mindset and tools.  Value stream mapping is a method for visualizing complicated operations to identify sources of waste.  It assumes that “waste” is obvious once the layers of complexity are peeled back.  But distributor operations, such as order management and warehouse picking, are really not very complicated processes, although they are often very taxing events.  Distributors are in the business of responding to the idiosyncrasies of individual customers - being consistently inconsistent.  While manufacturers strive for predictability and repeatability, a distributor’s close interaction with thousands of unique customers ensures that these are neither attainable nor desirable.  The hard part is determining which of the inconsistencies are truly valued by the customer, a question which is largely unasked by the traditional lean approach.   

In our experience, problems that appear to be operational, such as low warehouse productivity, are often just the symptom of upstream customer management, sales and marketing issues.  More holistic approaches that start with fundamental business objectives, such as the theory of constraints, have proven to be better tools for optimizing distributor operations.    
 

All Roads Lead to Sales 

Before congratulating themselves on their efficiency and dumping the lean textbook, though, executives may want to consider a revealing question: “What is the distributor equivalent to the work-in-process inventory issue that dogged manufacturers in the 1970s and 80s?”  The honest answer for most industries is the sales function.  Many commentators have noticed that selling costs remain the single largest expense for most distributors and that sales productivity has hardly budged in the past 10 years (Benfield, 2004).   

Of course, the analogy is pretty crude, but many lean concepts and tools have a direct application to distribution sales.  For example, manufacturers secretly loved their mountains of WIP inventory because, like the high tide covering rocks, it masked production problems.  By forcing inventory levels down, JIT exposed underlying operational weaknesses, which then had to be confronted head-on.    Just-in-time inventory replaced just-in-case inventory.   

Is this not exactly like the salesman’s milk run?  The customer doesn’t really need to see him, and may not even care about having an assigned account rep.  But he still calls on every account just in case there is a service issue.  Often, the rep feels he must personally place orders and hand deliver shipments because he can’t trust the order desk or warehouse.  Distributors continue to use the same expensive direct sales channel for all customers because they don’t really believe that their inside sales force or their web site will perform adequately.  These are all expensive examples of just-in-case service that represent a huge waste of the most precious resource: field sales time.   

As in the early days of JIT, distributors are often unaware of the waste in their sales function.  They don’t measure best practices, sales performance drivers or true productivity.  The philosophy of lean is that one must measure to manage.  Top performing distributors apply this concept by clearly defining strategic sales objectives and instituting scorecards to track performance against them.   

In distribution, the sales process is typically far more procedurally complex than order fulfillment.  It is also still largely a craft rather than a process.  This makes it very amenable to a value stream mapping type exercise.  The interplay between activities such as pipeline management, account targeting, call budgeting, prospecting, product introductions and training is ripe for visualization to identify waste.  A value stream mapping exercise might identify activities like call reports or stock checks as failing to add value.  The techniques and time allocation used by the best sales reps can act as the ideal “future state” map for the entire sales force.   

Experience has shown that a more rigorous evaluation of sales processes has the potential to increase revenue as well as reduce expenses.  For example, a Midwest liquor distributor reduced the number of accounts per rep and put smaller accounts on a replenishment program (they weren’t really buying new things anyway).  This reduced selling expense and gave top customers the attention and service levels they deserved. It actually increased sales to replenishment accounts, because the reps visited when the customer wanted to see them, not when the “milk run” passed by.   

Distributors are fundamentally sales organizations.  By applying the concepts of lean production to this core function, they can steal a page from the manufacturers’ playbook to make more money and maybe even gain a little respect.   

Steve Deist ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ) is a Partner specializing in strategy and sales management at the Indian River Consulting Group. IRCG is an experienced based firm specializing in Distribution. Started in 1987 by J. Michael Marks, IRCG has specialists who consult with distributors and suppliers to make the changes necessary to maintain competitive advantage. You can contact them by calling 321-956-8617, or visit www.ircg.com for more information.