It seems as though a potato chip company called Route 11 went from nothing to a decent little business largely by offering a variety of different types of chips (crisps for our friends who worry about God saving the Queen). And it would also seem that lot sizes and delivery frequency have an impact on their ability to make money by offering a lot of different varieties. So they reduced the number of types of chips they sell. And so we have an economist turned professor turned marketing expert sagely observing, “Determining the best product assortment often involves balancing the financial gains of operating efficiency with the long-term value of the brand. Overly broad assortments can lead to direct and indirect costs that hurt overall profitability. For some brands, overly narrow assortments can undermine their value.”
The professor is right about one thing – skinnying the product line undermines value. He is dead wrong – or at least has based his thinking on an assumption that is dead wrong – on the other half of his equation. He assumes that the costs of small lot sizes and more frequent deliveries are static – somehow chiseled on the flip side of the tablets Moses brought down from the Mount -the essence of economy of scale thinking.
“In Route 11’s case, packaging costs were lower for high-volume flavors relative to low-volume flavors because they could negotiate quantity discounts from the company that printed graphics on the bags. There were also less-quantifiable costs associated with so many flavors, but these costs certainly affected the bottom line. Producing fewer flavors would decrease the number of flavor-related changeovers the production line had to make. Each time the production process was stopped to change to another flavor, equipment had to be washed down thoroughly. Also, retailers that carried some of the slower-selling flavors had to allocate shelf space to them, which sometimes left too little space for the big sellers.”
While all of that accounting logic may well be true enough, reduce the changeover time and devise a JIT delivery scheme and – poof! – bottom line impact goes up in smoke. On the other hand, accept the professor’s logic – follow it to its logical conclusion and eventually end up with one type of potato chip that can be mass produced in staggering quantities and delivered in bulk … and go head to head with every other mass producing one-chip-fits-all potato chip maker and ultimately fail. Unless, of course, you can ‘innovate’ and conjure up an entirely new type of potato chip that can be produced in staggering volumes that is better than the other guys’ … and then hope they don’t ‘innovate’ something that puts you back at square one.
The real root of the problem is that every market consists of a whole bunch of niches of one. No two people share a common opinion of the perfect potato chip – or the perfect anything else. The bulk items are perfect for no one – they are simply close enough for enough people to buy them, but virtually everyone is open to switching potato chips if one comes along that is closer to their view of perfection.
Lean, with its small lot sizes and frequent deliveries, is the key to economically providing a broader range of products, leading to greater customer appeal, leading to more sales, leading to more profits. Economy of scale, mass production thinking is the path that inevitably leads to mediocrity, at best. It forces sales and marketing to push one-size-fits-all solutions onto a customer base where, in fact, one-size fits-no one. Price reductions (which means cost reductions which means China), promotions and coupons, clever advertising and the rest are the tools required to force fit hopefully ‘close enough’ products into markets comprised of niches of one.
In most companies, sales and marketing are completely detached from lean thinking, and lean tools are deployed in a fruitless attempt to improve costs in a mass market, economy of scale business model. Too bad. The emerging frontier in lean is sales and marketing. The good folks at Route 11 ought to think about checking it out. Or they could follow the professor’s logic and how they do against the likes of Frito-Lay selling one-chip-fits-all at Walmart.