The magic of lean

Toyota is now North America's third largest vehicle maker. And while Toyota was able to raise the prices of its new North American models, General Motors and Ford had to cut theirs to induce customers to buy. Yet they continue to lose out to Toyota - and to Nissan and Honda too. Toyota plans to be the world's number one vehicle manufacturer in 2008. It already makes more profit than General Motors, DaimlerChrysler and Ford combined.

Every little helps

Closer to home, homeowners spend more than one pound in every pound in every eight with Tesco. Its share of the UK gorcery market is 30.3%, nearly twice as much as Asda or Sainsbury's. Last year it achieved double digit volume and profit growth: a remarkable performance for a business its size. New growth businesses contributed £6bn of revenue in 2004/5, as much as the entire company was making in 1997.

At one time Tesco was seen as a grubby, discount retailer with small cramped high street shops. It nearly went bust in 1977, when an all-too-successful price cutting promotion attracted so many customers that it bottlenecked with a 50% increase in sales volume. If that sounds like music to the ears of marketing managers, who dream of 10-20% increases with their promotions, dream on. Tesco had slashed its already low prices to the point that it would have had to sell at least 66% more just to break even. The experience was so cataclysmic Tesco abandoned budget margins, moved to large out of town stores, and became a master of operations and logistics.

What's the connection between Toyota and Tesco? Both have a secret weapon that demolished their rivals, and transformed productivity, customer satisfaction and profits. Lean thinking is the weapon: lean manufacturing at Toyota, and lean service at Tesco.

The essence of lean, which Toyota pioneered in the 1960s, is to eliminate waste and progressively remove all the activities within the company that do not contribute to the value of the product supplied to the customer. As Toyota proved, this typically leads to producing twice as much from half the space, in half the time at half the cost. And because it tackles waste head on, quality of products, service and margins are transformed. Although Toyota is its most successful proponent, companies of any size can, and do adopt the philosophy and techniques of lean to put distance between themselves and their rivals. It is in fact harder to modify the behaviour of large mature businesses, so the advantage often lies with relatively smaller firms of those breaking in from the outside.

Tesco relies on customer 'pull' to dictate it's offerings rather than traditional sales 'push'. Its application of lean thinking to the supply chain also means that Tesco reorders from key suppliers that produce - in a matter of hours - items that have just been purchased. And instead of paying for seperate warehouses and staff to fulfil online orders , as its competitors did, it used existing staff to pick the orders off the shelves when stores were quiet. It is now the world's number one internet grocer. A leaner and more productive supply chain also enabled Tesco to diversify successfully into other retail formats, such as convenience stores, at minimal cost.

What has this got to do with building supplies? Well, both companies transformed their industries and stole the leaders' crowns. Lean thinking hasn't hit building supplies, but when it does new faces will threaten established players. Builders' merchants: ignore it at your peril.