One Square at a Time

Six or so years ago when I was starting my contract manufacturing company I was really trying to implement lean manufacturing from the get-go.  What an opportunity to be free of institutional inertia and bureaucratic band-aids!  Plus I was the boss.  So as part of that effort my partners and I designed our new building with minimal storage space, and to make a point we even suggested to our new administrative assistant (/materials manager /HR manager /etc) that she procure toilet paper one roll at a time.  That’s when we found out who the boss really was. 

Perhaps I should have suggested one step further: one square at a time.

Seinfeld had an episode that also contemplated the efficacy of one square of TP, and Sheryl Crow took a lot of… errr… crow for a comment she made on subject.  But those are a couple of rather well-off folks talking to a country of comparatively well-off folks.  When you can’t afford an entire bottle or roll, let alone the Costco bulk purchase, the economics change.

Every day, Martina Pérez Díaz spends about five hours sewing 70 pairs of black loafers by hand for a wage of 120 pesos, or about $11. When she wants to wash her hair, she walks to her local tiendita, or "small store," to buy a 0.34 ounce, single-use packet of Procter & Gamble Co.’s Head & Shoulders shampoo. The price: two pesos, or about 19 cents. "That I usually can afford," she says.

That’s from an article in the Wall Street Journal the other day discussing how Proctor & Gamble is looking at new models to grow some of its international markets.  I’ve been mulling it for a few days, "blogifying" if you will.  That process can take two paths… either like mulching to turn into something nice and fertile, or like decomposing where you eventually want to bury it as soon as possible.  Fortunately there’s a little mulch in that article.

The WSJ goes on to describe how there are millions of "mini stores" in Mexico and other developing countries, often no larger than a pantry.  They usually stock just one brand of each of a small number of fundamental items like shampoo.  In Mexico 80% of consumers rely on such stores.  Customers like Martina rely on them because they simply can’t afford to buy more than one single-use unit at a time, even though it would be cost advantageous to buy more.  Pricing and product selection revolves around what is available in people’s pockets, which isn’t much.

This presents a dilemma for companies like Proctor & Gamble.  First they need to engineer their products so they can be priced at a point for single unit comsumption.  As the article described, this sometimes means removing capabilities or components that aren’t applicable.  For example, anti-sudsing components of laundry detergent aren’t needed if the clothes are going to be hand-washed, one or two items at a time.  Removing some enzymes actually allows the price to be reduced.

They also have to figure out how to entice "store" owners to replace one brand of an item for a new one, since usually only one brand is stocked.  It’s not like you effectively rent a hundred feet of aisle space at the local Albertson’s.  You have to displace one other monopoly brand, with all the history and potential customer loyalty involved.  And you have to go through that competitive exercise at each of millions of tiny stores.

Which brings me to what I find the most fascinating part of this business development activity by P&G and others: distribution.  The topic isn’t focused on in the article, but my mind is spinning with the logistics implications of keeping millions of stores "stocked" with single units when they have zero or minimal stocking space.  In a way it is a deep implementation of kanban and one piece flow.  The closet-sized store has one or two of each item available, when one is consumed it needs to be replaced quickly. 

How do you do that?  There is no bazillion-dollar Wal-Mart style RFID point-of-sale system connecting to customized ERP systems that download directly to manufacturers and delivery trucks.  There’s no inventory management at all, and in many cases probably no phone system to call for delivery.  These merchants haven’t, luckily, even had the opportunity to worship the false god.

The upside is that you have to restock far fewer SKU’s.  The downside is that you have to be able to restock those products in miniscule quantities, anytime, anywhere.  Trucks making the rounds of millions of stores, and still making a profit.  Unless… perhaps nearby stores could mutually restock, in effect sharing some stock.  Competing pharmacies in the U.S. do this now, with Rite-Aid calling Medicine Shoppe next door if they are out of something, and swapping inventory on the fly.  Call it a "mesh network" of distribution perhaps.

Mark over at the Lean Blog discussed this article, but from a completely different standpoint.  He was more interested in the pricing aspects of such a model.

The article doesn’t mention "Lean," but it takes us to the Lean notion of Profit = Price – Cost, where the Price is set by the market and your job, as producer, is to get your Costs low enough to be able to hit your Profit targets. Traditional business thinking (which pretty well ignores rules of economics) takes your production cost and what might be called your "entitlement profit" (such as "I need 10% profit on this") and determines the Price as Cost + Profit.

That’s a good take, and a subject I’ve also harped on before.  If you are new to this world and believe both pricing equations are the same, then I’d suggest you read this.

But the product still needs to get to the millions of closet-sized stores, everywhere, everyday.