Implementing a Lean Front-End  How Do You Measure Success?

Learn how front-end process optimization contributes to establishing a customer-centric value stream, and use the following KPIs to measure the success of your company's lean front-end initiative and its impact on overall business performance.

Lean manufacturing arrived on the scene several years ago as a result the success Toyota and other Japanese manufacturers were having with this system as Womack and Jones described in their revolutionary book The Machine That Changed the World. A growing number of companies are now adopting kaizen initiatives for continuous improvement, kanban replenishment and demand-driven flow manufacturing processes based on a "pull" rather than "push" philosophy. The purpose of lean manufacturing is to eliminate waste, reduce inefficiencies and inventories, and improve on-time delivery rates.

The success of implementing lean techniques and technology solutions for back-end production and fulfillment processes has spurred an extension of the lean philosophy, as many manufacturers have begun to apply lean strategies beyond the shop floor. Manufacturers are now applying lean thinking to streamline their front-end selling processes, from opportunity to order. This includes automating product selection and configuration, pricing and quoting, and order processing. By applying lean thinking and web technology, manufacturers can eliminate the delays and errors inherent in the cumbersome front-end processes typically used to sell complex products across multiple channels. Just as they have done on the back-end, manufacturers must eliminate front-end "waste" to remain agile and competitive in today's global economy.

A recent study conducted by AMR Research, a leading manufacturing industry analyst, indicates that maintaining quote and order accuracy using a manual, spreadsheet-based quoting process for configurable products across multiple sales channels is a huge challenge and typically leads to high quote error rates, invalid configurations and extensive intervention by engineering and customer service resources. Frequently the net result is lengthy quote response times and low quote-to-order conversion rates.

To alleviate these "pain points," manufacturers of configure-to-order (CTO) and engineer-to-order (ETO) products are increasingly turning to Web-based sales solutions in the hopes of achieving the business benefits made possible by a lean front-end. This article examines how front-end process optimization contributes to establishing a customer-centric value stream and describes several key performance indicators (KPIs) by which a company can measure the success of a lean front-end initiative and its impact on overall business performance.

Measuring the Effectiveness of Front-end Processes

What you do not measure, you cannot improve. The reason that front-end processes are especially vexing for producers of complex industrial and technology products, as well as for manufacturers with large, complex sales and distribution channels is because front-end inefficiencies directly impact the customer's experience and resonate across the entire supply chain, affecting quality, customer service levels, and, ultimately, profit margins and profitability.

Speed, cost and quality are the most critical metrics in determining customer value. Additional metrics for the manufacturer include customer retention and revenue growth. Front-end processes are typically the least optimized of any segment in the value chain, since lean thinking has not yet been rigorously applied to sales processes. Consider how the following scenarios — all common experiences in a host of manufacturing environments — result in less-than-optimal performance in each of these critical sales order-processing areas.

* Inconsistent quoting and frequent pricing errors due to a lack of standardized practices and over-reliance on tribal and key individual knowledge result in lost profits and/or dissatisfied customers.

* Frequent proposal, bill of material (BOM) and order entry errors necessitate time-consuming rework and multiple handoffs, resulting in delayed customer response, lengthy quote-to-order cycles and lost business opportunities.

* Routinely high selling, administration and engineering costs erode gross profit margins and contribute to reduced marketplace competitiveness.

* Sales channel inaccuracies, inconsistency and confusion resulting from outdated printed catalogs and misunderstanding of customer requirements lead to reduced sales effectiveness and lost business opportunities.

Applying strategic lean thinking and implementing an effective lean front-end technology solution can help streamline the entire range of opportunity-to-order processes and enable companies to realize measurable process improvements and results.

Taking a Strategic Approach to Front-end Process Optimization

Only companies that succeed in maximizing speed, accuracy and efficiency can succeed in satisfying customers, reducing costs and enhancing margins. Achieving these goals demands a well-planned and intelligently implemented lean front-end strategy, driven by the specific business model and workflow pain points, as well as strategic corporate objectives related to return on investment and bottom-line benefits.

The first step should be a careful process mapping of the front-end portion of the value stream. This mapping helps a manufacturer understand how each existing process step contributes to or detracts from the overall value stream. This analysis serves to identify the source of bottlenecks, waste and delays and helps companies determine how inefficient processes can be improved to eliminate waste and add more value. Typical front-end processes to be mapped include all of the business processes required to convert a customer inquiry into an order. The front-end processes to be analyzed include quote and order management, product selection and configuration, application engineering, BOM generation, sales reporting and analytics, and channel and customer management.

The next step is to evaluate how your current systems support the current value stream. In the front-end process, manufacturers only deal with information flow in the form of paper and electronic documents, including customer specifications, requests for quotes (RFQs)/requests for proposals (RFPs), quotes, proposal packages, drawings and purchase orders. Thus, understanding how your information systems support the value stream is critical, since the limitations of the current systems often cause substantial waste such as duplicative data-entry and redundant work steps. This is different from back-end lean optimization, where the material flow is crucial. Before there is an order, there is no material flow, but only information flow.

Once the current processes and systems are understood, then the manufacturer can design the optimal future state value stream and the systems that will optimally support the optimized processes. This requires an understanding of how new information technologies, such as Web-based software for online collaboration and information sharing, can help to eliminate wasteful process steps and mistake-proof the process.

Without considering new information technology, the potential improvements are limited. An example of this is the airline check-in process. Without considering technology, a check-in agent would always be required and potential improvements would be limited to that check-in agent's skills and training. By introducing technology, airlines now provide self check-in terminals that eliminate the need for a check-in agent and provide faster, more accurate customer service. Today, self-service check-in can be completed in about 15 seconds, while the old process involved lengthy queues and at least one- to two-minute interactions with the agent for every passenger.

Once the future state process and systems have been designed, then a manufacturer has to develop an implementation plan, which will include selecting a front-end technology solution with the power and scope required to support the future state processes and systems. The solution should provide a single virtual platform that provides all the knowledge, information and tools required by sales, channel partners and customer in one place. It should be scalable to accommodate business growth — whether growth occurs organically or through a merger or acquisitions. And, it should provide deep, multifaceted functionality that encompasses the entire quote, order and product configuration cycle.

Finally, given today's speed of business and new ways of doing business, selecting a Web-enabled front-end solution is critical to success. According to a recent Industry Week article on customer order management, while a majority of industrial manufacturing orders are still being transmitted via fax, postal mail and phone, that is changing rapidly. Web-enabled, wireless, e-mail, intranet/extranet and conventional electronic data interchange (EDI) orders are on the rise, and this trend is expected to grow over time. Building and commissioning a Web-enabled order management system sooner rather than later is becoming an imperative for doing business, just like purchasing a fax machine was 30 years ago.

As many companies have learned with their back-end manufacturing and fulfillment process optimization initiatives, continuing to improve speed, quality and costs is key to remaining competitive fast-paced global marketplace. The biggest opportunity for further improvement is in the front-end sales processes. These can be streamlined by creating a Web-based portal through which a company's internal and external sales force, as well as dealers, distributors and customers, can communicate freely in real time, and product and order status information can be made available around the clock, around the world.

The decision to implement a lean front-end strategy entails much more than choosing a functionally rich, Web-enabled software solution. The lean front-end is not just about technology, but is rather a commitment to a customer-centric, value-based business transformation with technology deployed as an enabler to standardize operational processes and improve business performance.

Measuring the Success of a Lean Front-end Transformation

Establishing metrics helps companies evaluate and ensure the success of any technology-driven process improvement initiative. This includes measuring how the software will improve the speed, efficiency and quality of operating procedures. It also includes business performance metrics, such as: How will this transformation affect the business, in terms of faster throughput, higher productivity, reduced costs, increased sales, higher profit margins and superior customer satisfaction? And, how quickly will the investment pay for itself in terms of ROI and competitive advantage?

The most significant KPIs of a successful lean front-end transformation include:

* Reduced Lead and Cycle Times. With a single cohesive system, front-end personnel — as well as distributors and manufacturer's representatives — can quickly create consistent, accurate and cost-effective proposals, complete with engineering drawings and accurate pricing. By granting 24/7 access and providing complete guided selling information, companies can reduce quote-to-order cycle times by 50 to 100 percent and eliminate one to four days from the order-to-shipment cycle.

* Mistake-Proof Quoting and Pricing. With the configuration logic, pricing rules and workflow, quote and order errors can be eliminated. This can result in 100 percent clean orders and in the elimination of 80 to 90 percent of credit memos caused by pricing errors.

* Faster Customer Response Time. With all required data, including historical order information, available through a Web-based portal, sales personnel can respond to customer queries in seconds or minutes rather than hours or days.

* Higher Fulfillment Rates. Technology-enabled automation results in greater quoting efficiency and faster order processing — from order to production — resulting in higher throughput of finished goods.

* Margin Improvement. Standardizing, automating and synchronizing front-end processes can reduce SG&A by 10 to 20 percent, which typically reduces operating costs by 2 to 5 percent of revenue and boosts operating profit by 30 to50 percent. Margin improvements are typically achieved through faster and more accurate quote generation, automated order entry with no errors, decreased need for sales engineering support, and fewer demands on customer service resources.

* Revenue Growth. Automating quote follow-up and improving quote management through accurate real-time reports can increase quote conversion ("hit rates") by several percent. Improved price control, up sell and cross-sell capabilities can increase average order value by 10 percent.

Early Adopters of Lean Front-End Strategy Report Dramatic Results

Streamlining their front-end business processes has helped many manufacturers significantly improve their quote-to-cash speed and accuracy and enabled them to present one face to customers, despite the complexity of their product lines or sales channels. In addition, in many cases, integration of their lean front-end solution has enhanced the performance of their existing enterprise resource planning (ERP) systems.

Following are a few real-world examples of early adopters' lean front-end optimization results:

* A leading manufacturer of process equipment reduced quote and order cycle times by 50 to 80 percent, reduced order and BOM errors by more than 90 percent, and improved on-time delivery performance by 12 to 17 percent — with order-to-shipment cycles dropping by an average of four days. The company also was able to integrate its lean front-end application with its AutoCAD system and enhance the quality of its proposals with dynamically generated computer-aided design (CAD) drawings. As a result of these improvements, the firm has reduced misapplications and warranty costs and significantly improved customer satisfaction.

* A major supplier of fluid handling equipment systems applied value stream mapping, lean thinking and a lean front-end technology solution to improve its customer service process. Not only did the firm manage to reduce customer care steps from over 50 steps to just three, but also increased sales by 30 percent while improving customer service productivity by more than one-third.

* A major supplier of plastics processing auxiliary equipment reduced sales costs by nearly four percent of revenues. The company was also able to compress its ERP system's 12,000 configuration rules into less than 1,000 rules nested wholly within its lean-front end database and portal.

* A leading manufacturer of fluid handling systems for industrial applications realized a 50 to 70 percent reduction in quote generation time and application engineering resource utilization, while achieving 100 percent quote accuracy.

Leveraging the channel management component of its lean front-end solution to encourage online orders, the same company now receives over 80 percent of sales channel orders via the Web, since its manufacturer's representatives can configure, price, quote and order mixers and parts completely online. These orders flow directly into the manufacturer's enterprise system and onto the shop floor without any manual processing.

* A global provider of complex water treatment systems and filtration equipment implemented a lean front-end strategy and technology solution supporting multilingual and multi-currency requirements. The company succeeded in reducing engineering time per proposal from over four hours to about 40 minutes — and has also increased the average value of quotes by nearly 10 percent using cross-selling and up-selling tools for related parts and accessories.

Lean Thinking: A Process of Continuous Improvement

Adopting a lean philosophy across the enterprise, including critical customer-facing front-end processes, makes good business sense in both the short- and the long-term. As one industry analyst recently noted, relative to targeted process improvements, such gains are not measured in mere basis points but in orders of magnitude. This is borne out by the operational and business improvement examples discussed here.

Challenged to increase earnings in relatively stagnant economic times, manufacturers cannot rely on the market alone to drive growth. Today, many manufacturers are turning to mergers and acquisitions, global outsourcing and/or penetration into high-growth global markets such as China and Eastern Europe. Depending on a company's size and market position, these growth strategies can turn out to be costly and their outcome uncertain. Implementing a lean front-end, however, presents a more cost-effective, less risky opportunity to drive out bottom-line costs and pave the way for organic top-line growth.

A key industry analyst predicts that information technology spending by small to midsize businesses will increase by about 6 percent in 2004 and be driven primarily by projects designed to improve business processes and customer satisfaction, rather than cost savings alone. High on the list of IT priorities are Web applications, intranets, self-service extranets, portals, e-business and B2B e-commerce. Lean thinking and implementing a comprehensive lean front-end solution may be the most profitable way of all to chart continuous improvement of these critical business processes.

SIDEBAR: Implementing a Lean Front-End Solution: Ongoing Value Realization is the Goal

In evaluating existing front-end business processes for improvement, consider the potential objectives:

* Sales representatives and distributors instantly generate quotes online in the field, without support from the sales and engineering teams.

* Every quote is generated at least 50 percent faster and with 100 percent accuracy, and quotes are converted to orders with one simple click.

* Orders are submitted online and flow "hands-off" from customers or channels to the enterprise system and shop floor, with no intervention.

* Quotation costs drop 20 to 70 percent, order entry costs plummet by 50 to 80 percent, and fulfillment cycle times improve by 50 percent or more.

* Over 80 percent of customer service inquiries are resolved quickly through self-service over the Web.

* Up to 75 percent of printing and distribution costs for catalogs, technical bulletins and price sheets are eliminated.

These are just a few of the value-based benefits reported as a result of front-end process optimization. Following are some of the steps involved in evaluating, defining, mapping and implementing a lean front-end strategy and solution.

* Start by mapping the entire sales process value stream from initial customer inquiry to order. Include your sales channels (e.g. reps, distributors) and map the flow from the customer backward. Identify waste and causes of errors.

* Gather direct input from the customer and/or distributor. Get their perspective on your current service levels. Don't assume that you know how happy your customers are with your responsiveness and the quality of information you provide them. Ask them how you can get better.

* Map your current systems and sales tools. Evaluate how well they support your current sales process and how well they support efficient information flow during the quoting, ordering, and customer service processes.

* Consider how Web technology can help you make improvements not possible in a traditional paper-based process paradigm. Design the future state value stream while considering how you can apply Web technology to make radical breakthroughs in the process. Paper processing, data re-entry and faxing are all inherent forms of waste that Web technology can help to eliminate. If you don't consider technology then you can only go so far in eliminating waste. It is like redesigning an airport check-in without considering the possibility of self-service kiosks.

* Establish a detailed project plan and project organization with clear roles and responsibilities. Make it clear who has to do what and when to keep the project on-track. Dedicate the right resources to the project and hold frequent check-ups with senior management to address any issues.

* Rapidly prototype a Web-based solution and iterate based on pilot user feedback. Involve key customers, distributors, sales and engineering staff in the pilot, so that all process participants needs are required. Use this feedback to tailor the solution before a broad roll-out.

* After you go-live, track improvement metrics to measure success and drive continuous improvement. During the initial value stream analysis, be sure to establish baseline metrics based on the current state process so that you can accurately track the project and measure improvements over time.

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