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Demand Chain Management: An Integrative Approach in Automotive

Retailing

Article  in  Journal of Operations Management · November 2002

DOI: 10.1016/S0272-6963(02)00036-0

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 Journal of Operations Management 20 (2002) 707–728

Demand chain management: an integrative approach

in automotive retailing
Peter Hines a,∗ , Riccardo Silvi b , Monica Bartolini b
a Lean Enterprise Research Centre, Cardiff Business School, Aberconway Building, Colum Drive, Cardiff, CF10 3EU, UK
b Bologna University, Forlı̀ Campus, P. le della Vittoria, 15, 47100 Forlı̀ (FC), Italy

Abstract
Recent reviews of the ‘operations management’ (OM) research literature have shown a surprising little shift towards empir-
ical methodologies from traditional modelling solution methods. In addition, there is generally a lack of empirical testing and
validation of manufacturing strategies. Coupled to this fact is that empirical work is rarely carried out in an inter-disciplinary
manner, with the complete combination of OM, marketing, strategy, lean thinking and accounting approaches particularly
poorly researched. Fully cross-functional integrative empirical research is required to help support the understanding of the
applicability of OM practices within industry. This paper explores such an integration of approaches developed within the
‘lean thinking, strategic cost management, marketing and policy deployment areas’. In order to investigate the approach a
single automotive retailer is used as an instrumental case. The results of the study show that the new approach stands up
well as an integrative approach that can prove highly beneficial results. However, the pilot work also identified a number of
limitations that are the basis of further refinement and testing of the method.
© 2002 Elsevier Science B.V. All rights reserved.
Keywords: Accounting/operations; Case study research; Interdisciplinary; Marketing/operations interface; Operation strategy; Process design;
Service operations

1. Introduction Previous debate has often attempted to show that

Ever since the pioneering work of Jay Forrester
in the 1950s academics, consultants and practition-
ers have been searching for the ‘holy grail’ theory,
method or solution that will cure all of their supply
chain ills. Theories or approaches have come from
systems dynamics, time compression, lean thinking,
business process re-engineering, agility, mass cus-
tomisation and the virtual organisation (respectively,
Forrester, 1961; Stalk and Hout, 1990; Womack
and Jones, 1996; Hammer, 1990; Kidd, 1994; The
Economist, 2001, Davidow and Malone, 1992).
∗ Corresponding author. Tel.: +44-2920-876005;
fax: +44-2920-874556.
E-mail address: hinespa@cardiff.ac.uk (P. Hines).
one approach is superior to another and that a new ap-
proach answers all previously unanswered questions.
In doing this, such research has provided many in-
sights into the improvement of both the internal opera-
tions of companies and the wider network of customers
and suppliers. However, almost invariably work has
been attempted from a functional rather than process
basis (Schonberger, 1986; Ostrenga and Probst, 1992)
and in most cases has concentrated on finding the
most efficient or effective way to sell the products or
services produced (Porter, 1985; Towill, 1996), often
relying on modelling solution methods (Scudder and
Hill, 1998; Pannirselvam et al., 1999). Attempts to in-
tegrate the real demand or customer perspective into
supply chain thinking, although not unknown, are far

0272-6963/02/$ – see front matter © 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 2 7 2 - 6 9 6 3 ( 0 2 ) 0 0 0 3 6 - 0
708 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728

too rare (Christopher, 1992; Womack and Jones, 1996;
Archer and Wesolowsky, 1996).
In addition, in many previous approaches re-
searchers have attempted to develop an appropriate
solution to the improvement of the real case sup-
ply chain based on a specific methodological ap-
proach, which often leads to predictable solutions.
For instance, advocates of ‘systems dynamics control
theory’ invariable suggest the elimination of a distri-
bution tier (Towill, 1996), whereas followers of the
‘parallel interaction’ school may be required to adopt
a supplier development and co-ordination approach
(Wilding, 1998). There appears to be a significant
danger here that solutions are not being tailored to
particular ‘supply chain’ requirement, but more to
the prescriptive solutions of particular approaches.
Thus, the key determinant of the solution may be
the method chosen and not always the actual supply
chain dynamics. What is called for is an integra-
tive approach that seeks to gain a more holistic and
contingent decision making approach.
2. An integrative approach
In order to develop such an approach the authors
have attempted to draw from four complimentary
management areas, namely, ‘process-based lean man-
agement, strategic cost management, marketing and
policy deployment’. However, presently none of these
approaches with their respective toolkits, on its own,
is capable of a truly holistic approach. Each has its
own strengths and weaknesses (Table 1).
The ‘lean management’ approach relies on five
key principles: ‘understanding customer value, iden-
tifying the value stream that adds this value, creating
flow of product and information, using customer pull’
and in so doing ‘seeking a wasteless perfection state’
(Womack and Jones, 1996). In order to implement
such a ‘lean system’ a series of tools and approaches
have been developed which primarily fall into two
categories: diagnostic/analytical and implementation
(Bicheno, 2000). Within the diagnostic/analytical
area are the ‘value stream mapping tools’ (Hines
and Rich, 1997; Rother and Shook, 1998; Hines and
Taylor, 2000). The implementation toolkit includes
a wide variety of tools drawn from the ‘just in time
and total quality/six sigma schools’ (Shingo, 1989;
Ishiwata, 1991). Although the ‘lean’ paradigm is
widely accepted in manufacturing industry, it has yet
to make a major impact away from the shop floor
and particularly outside manufacturing firms. In ad-
dition, it does not presently have a widely accepted,
rigorous customer focus approach, nor a good way
of measuring financial benefits, although research is
ongoing in both these areas (Hines et al., 1998; Brunt
et al., 1998). Indeed, there is a general lack of ma-
terial in the operations management (OM) literature

Table 1
An integrative approach
Process-based lean management Strategic cost management Marketing Policy development

Strengths
Effective non financial measures Able to develop effective
financial measures
Analytical fact-based approach Not overly bureaucratic
Practical approach Can be linked to
tangible benefits
Addresses processes not functions Addresses processes and/or
functions
Weakness
Lack of financial measures Lack of non financial
measures
Lack of rigorous tools to understand Lack of rigorous tools to
customers understand customers
Often only employed in manufacturing Lack of rigorous tools at the
shop floor environment shop floor level
Effective tools to understand
customers
Effective at integrating with
business strategy
Lack of integration with
internal processes
Lack of integration with
financial performance
Holistic business
approach
Links financial and non
financial measures
Deploys strategy to
operational areas
Lack of detailed
operational tools
 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
specifically linking production performance to ap-
propriate costing systems (Fullerton and McWatters,
2001).
‘Strategic cost management’ is well equipped to
address the major shortcoming of a lack of financial
measures, as it has the stated objective of using cost in-
formation, often gathered from several heterogeneous
sources, to define and create a competitive advantage
(Shank and Govindarajan, 1993a,b). Within ‘strategic
cost management’, managers look for ways to lever-
age the industry value stream in unique ways that
reduce the cost and complexity of completing trans-
actions. The key contribution of the approach is that
it takes an external view of cost and raises the un-
derstanding of how company activities can be better
leveraged and aligned with the market to improve
performance (McNair et al., 2001b).
In particular, ‘strategic cost management’ provides
an innovative perspective on the way that choices of
task environment can affect costs structure. It focuses
its attention on the distribution of activities within the
whole system, in order to reconstruct the value gen-
erated overall by the industry and grasp how value
is distributed between the different companies (Shank
and Govindarajan, 1993a,b).
A recent development of the ‘strategic cost
management’ tools (McNair et al., 2001a,b) provides
an innovative framework to describe a company’s
cost structure in a form compatible with the engi-
neering business process analysis, typical of a ‘lean
management’ approach. In summary, it allows the re-
searcher to capture the potential relationship between
customer/market requirements, defined as an array
of value attributes with unique customer weightings,
and the firm’s economic and activity structure. This
model assumes that the resources available to provide
products and support internal operations are chan-
nelled into a number of processes, or activity streams,
that result in any number of outcomes. Although
the nomenclature is slightly different from that used
within ‘lean management’, a similar view is taken
of process-based value adding (VA) and waste (W)
viewed from a customer (or consumer) perspective.
Thus, in contrast to ‘activity-based costing, strategic
cost management’ provides a useful distinction be-
tween the activities based on their respective value to
the customer (Ostrenga and Probst, 1992) through a
process-based orientation.
709
‘Strategic cost management’ assumes that in order
to analyse cost behaviour you need to explore the
causal relationship between the use of resources and
the root causes of their consumption within key pro-
cesses (Ostrenga and Probst, 1992). As a result the ap-
plication of ‘strategic cost management’ can help firms
and wider ‘supply chains’ to enable change rather
than inhibiting or mis-directing it, as often occurs
with many more traditional accounting approaches
(Johnson and Kaplan, 1987).
There is, therefore, a good deal of convergence
between the ‘lean and strategic cost management’ ap-
proaches. Both also are starting to rely more heavily
on understanding customer needs. As a consequence,
moving to a “total firm perspective”, a third role
should be played by various marketing tools, through
the identification of the key attributes in the eyes of
the customers and the assessment of their respec-
tive weighting (Wayland and Cole, 1997; Green and
Srinivasan, 1990; Lancaster, 1971). This will aid
company’s efforts in designing and improving pro-
cesses. Thus, the description of the customers’ value
profile becomes strategic as it the basis of understand-
ing how to create a competitive advantage. It involves
the direct participation of the management but, most
of all, of the customers, moving from an internal focus
towards an external one. However, by combining the
three approaches we are able to connect the market-
ing approach to the operations of the business. Hence,
we can move to a marketing philosophy focused on
matching the needs of the customer with the ability
to deliver value, instead of expanding the number of
product variations as a means of increasing market
share (Turney and Anderson, 1989).
It is our contention here that an integrated or holistic
process-based approach is the most effective way to
drive companies towards a competitive advantage. As
a result the research team faced the challenge of de-
veloping marketing, cost, and operations approaches,
tools and languages in order to be able to speak to one
another. In addition it was necessary to integrate these
different approaches in order to guide the direction
of a company or wider ‘supply chain’. The approach
chosen to do this was ‘policy deployment’. ‘Policy
deployment’ may be described simply as an approach
to focus the operations of a whole company according
to a set of expected results by the use of a rigorous
set of guidelines for the achievement of these targets.
710 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
‘Policy deployment’ is generally regarded as a west-
ernised, and often simplified, version of the Japanese
Hoshin Kanri approach (Akao, 1991). In its simplest
form (Hines and Taylor, 2000), it involves a firm
codifying its strategic direction, aligning a set of
‘key performance indicators’ (KPIs) to this and then
checking that all its improvement activities are de-
signed to produce optimum results by being directly
alignment with the achievement of these results.
3. Methodology
The methodology used in this research was an ‘ac-
tion research’ driven case study approach (Yin, 1989).
This case approach is required because of the need for
a very flexible and holistic research design (Hakim,
1987), that involves a combination of different meth-
ods in order to deal with the complexity and variety
of data (Hartley, 1994; Yin, 1989). In particular, the
present work uses the case study as an “instrumental
cases” (Stake, 1998), where the case facilitates the un-
derstanding of some more general issues. This realist
approach was chosen as the conceptualisation of a the-
oretic research model was simple; however, the nov-
elty of the research was how to implement such a set
of diverse approaches, an empirical testing called for
by many in the OM literature (for example: Anderson
et al., 1989; Smith and Reece, 1999).
A single pilot case study of an automotive retailer
based in Wales was developed during the first 6 months
of 2001. The choice of a single case study is mostly
related to the complexity of this kind of analysis, as
it involves a time-intensive global approach to a com-
pany (including its market) and the combination of
several techniques and methods, such as the use of sec-
ondary data, observational techniques, interviews and
surveys. In total, this research involved approximately
250 man days of field research.
As it is necessary to have the full (and time consum-
ing) involvement of the management, the selection of
this case has been based primarily on the company’s
willing to take part in the study and their expectation
of gaining from such an ‘action research’ approach
(Wass and Wells, 1994). In fact, this propensity guar-
antees a very full access. The firm had become aware
of the potential of ‘lean thinking’ as one of its senior
staff members was attending a diploma level course
on the subject. However, the problem the firm faced
was that it was unsure as to how to proceed in im-
plementing such an approach. At the same time, the
firm was also selected as it had a traditional account-
ing systems and had identified a need for change. A
limitation of this research is that the detailed findings
relate to the particular case company alone. The find-
ings, in terms of the specific improvement activities
that the firm should take are likely to have a wider ap-
plicability in the industry, but inferences from a single
case need to be made with care (Yin, 1989). However,
inference on a more general applicability of this type
of research approach can be made with more surety.
3.1. The research approach
The starting point for the research was to under-
stand the firm’s existing business strategy and general
policy. This was undertaken with the four most senior
managers in the business and was facilitated by the
research team primarily using a process, rather than
expert facilitation approach. This was undertaken over
a series of on- and later off-site 2–4 h sessions. These
were well received by the firm but even these short
sessions caused some dislocation to normal operations
due to the great reliance the firm placed on its two
most senior staff. This approach sought to: establish
the ‘critical success factors’ for the firm, review and/or
define the appropriate ‘KPIs’, define the key business
processes and to understand which processes need de-
tailed analysis and improvement.
In order to understand the customer view, a struc-
tured interview form was developed. The primary
purpose of this was to establish which factors the cus-
tomers thought were important in the service that was
provided to them by the dealer and how good the dealer
was in satisfying them. This was developed by gain-
ing the views of the staff at the dealer and then testing
with 95 face-to-face validation interviews with cus-
tomers in the dealer. Again the staff at the dealer were
very co-operative as the research was viewed by them
as of central importance in gaining competitive advan-
tage for them. During this validation stage the ques-
tionnaire was modified slightly both in terms of the
factors or ‘value attributes’ chosen and a change from
a fixed total scale for the ‘value attributes’ to a Lik-
ert type scale. The latter change, although somewhat
compromising validity, was felt necessary in order to
 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
improve response accuracy and response rate when the
questionnaire was subsequently sent as a postal ques-
tionnaire to customers. One thousand five hundred
and twenty postal questionnaires were sent to existing
customer and 502 usable responses were received rep-
resenting a 33% response rate. Cluster analysis was
then carried out on these questionnaires (Green and
Srinivasan, 1990) Although this approach has certain
limitations in terms of the distance metric and link-
age algorithm chosen (Wass and Wells, 1994) it was
felt appropriate for customer segmentation, at least
at an indicative level. Once this indicative clustering
had been carried out using SPSS 10.0 software, it
was found that most of the population fell in one
cluster. The cluster analysis was carried employing
casewise ‘hierarchical cluster analysis’, asking for a
single solution with a maximum of five clusters. The
‘hierarchical cluster analysis’ method is particularly
suitable where there is a limited number of cases
as here. For clustering, the ‘between-group’ linkage
(default) method was employed and, as a measure,
the squared Euclidean distance (default) method. The
results showed that a single important group repre-
sented >90% of the cases meaning that there was one
main cluster.
In order to understand internal process activity,
the three primary processes that had been identified
(new cars order fulfilment, used car order fulfilment
Fig. 1. Central dealer processes.
711
and servicing, Fig. 1) were mapped using the ‘value
stream mapping toolkit (Rother and Shook, 1998;
Hines and Taylor, 2000). The very minor areas relat-
ing to crash repairs and spare part over-the-counter
sales were excluded as they represented under 1%
of total turnover. This mapping work was facilitated
by the researchers using a process, not expert, facil-
itation approach as the researchers did not want to
create too much un-necessary reflexivity (Wass and
Wells, 1994). However, a limitation was that the staff
at the dealer initially saw the research team as ex-
perts, rather than process facilitators, an impression
that the research team had to work hard at changing.
The mapping involved three different internal expert
groups, one for each process together with one of the
senior managers acting as a research champion. In
order to understand the process costing, one of the
authors worked closely with the firm’s accounts clerk
in a series of semi- to un-structured interviews.
Once this data had been recorded, the final stage
was to validate the business strategy and develop an
improvement plan. This work was undertaken in 2–4 h
off-site sessions involving the researchers and the se-
nior managers in the dealer. Again the primary task
of the researchers was to be process facilitators, al-
though their role did change here, at times, towards
expert facilitation. However, in order not to invalidate
the neutrality of the main research team, this latter
712 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
role was taken by another university (and automotive
industry) expert who joined these sessions. The result
of these final sessions was a set of action plans ap-
propriately correlated back to the earlier defined ‘key
performance’ indicators.
4. Results
4.1. Business strategy formation and policy
At the start of this activity it rapidly became appar-
ent that the retailer had a well thought out business
strategy and understanding of their policy position.
However, the first problem was that this strategy was
not codified, nor necessarily disseminated to the staff
in the dealer. Secondly, the researchers identified that
this strategy had been highly influenced by the car
manufacturer who supplied all of their new cars.
In order to codify the strategy, the researchers fa-
cilitated a discussion using several strategic develop-
ment tools including SWOT, ‘environmental scanning
and growth vectoring’. Together with a related discus-
sion it was possible to define a set of ‘critical suc-
cess factors’ for the dealer (Table 2). The factors are
a mix of external (market facing) criteria and internal
efficiency and effectiveness areas. As these had been
established as important areas to address, the next fa-
cilitated workshop sought to see how well the existing
(implicit) strategy was being deployed into the busi-
ness by the existing measures. The reason for this is
that, in general, individuals and departments in a busi-
ness tend to focus on how they are measured rather
than business strategy when making strategic and op-
erational decisions (Dimancescu et al., 1997).
The existing set of measures (the most important of
which are shown in the first column of Table 3) had
Table 2
Critical success factors
Continue to growth markets share in the three channels
Recruitment, development and retention of skilled and
motivated workforce
External influenced innovation
Developing the right balance between the three channels
Close existing and new customer relationships
Keep the franchise
Long term focus and profitability
Continuing to develop brand presence
largely been influenced by the retailer’s supplier of
new cars. However, it was necessary to check whether
this set of measures would help drive the right be-
haviour in the dealer. This alignment was checked
using symbols for direct, indirect and negative re-
lationships and is illustrated in Table 3. The results
show that the existing measurement set is likely to
be very good at helping keep the franchise, devel-
oping long term profitability and keeping customers
happy. However, as there were few direct correlations
in the other columns of the table, it was felt that
the existing measures were far less likely to encour-
age external influences, a correct balance between
the channels and a growing market share. A cynical
observer may be led to the conclusion the existing
manufacturer-induced measures were good at helping
achieve what the manufacturer wanted, but less good
for the retailer. Indeed, ‘other outside influences’ may
distract from the manufacturer’s message, keeping
the retailer focus on the new car value stream, rather
than used cars or servicing, which is more profitable
for the manufacturer and growing market share at
the expense of another franchise same-brand dealers
would do little for the manufacturer. This finding
validated the dealer staff’s suspicions. This incident
does, however, illustrate the effect of power on supply
chain relationships (Cox et al., 2000).
The discussion around these measures also sug-
gested that there was no single very good measure
of market growth, an inadequate measurement set for
people issues and that the existing measures reflect
internal efficiency rather than wider external or cus-
tomer focus. As a result a number of new measures
were added:
• Market share (local region versus national average).
• Retention rate for new and used car sales for first
service.
• Retention rate for new car sales for service after 3
years.
• Service parts absorption (a profitability measure).
• Overall channel effectiveness measure for each
channel.
• ILU measure of staff skills and competencies.
These measures reflect customer-focused areas,
the interaction between the three key business pro-
cesses and internal effectiveness. The ‘overall chan-
nel effectiveness’ measures reflect a development
 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728 713

Table 3
Match with critical success factors
Measure C.S.F.

Growth R/D/R and External Balance Customer Keep the Long term Develop
market motivated innovation between three satisfaction franchise and profit brand
share people channels focus presence
Retail G.P. (%) 䊊 䊉 䊊 䊉 䊉 䊉 䊉
Fleet G.P. (%) 䊊 䊉 䊊 䊉 䊉 䊉 䊉
Used G.P. (%) 䊊 䊉 䊊 䊉 䊉 䊉 䊉
Used vehicle stock turn 䊊 䊊 䊊 䊉 䊉 䊊
Finance (% new car) 䊊 䊉 䊉 䊉 䊊
Workshop utilisation (%) 䊉 䊉 䊉 䊊 䊉 䊉
Part sales per vehicle in area 䊉/− 䊊 䊉 䊊 䊉 䊉 䊊
Hours sold per VIA 䊉/− 䊊 䊉 䊊 䊉 䊉 䊊
Parts stock turn 䊊 䊉 䊉 䊊
Administrative expenses (%) 䊊 䊊 䊉 䊉
1–2 4 0 3 5 9 10 4

Symbols: 䊉, direct relationship; 䊊, indirect relationship; −, negative relationship.

of the ‘overall equipment effectiveness’ measure
used so successfully by lean manufacturing firms
(Rich, 2000).
Targets were then developed for each of the re-
tained existing measures and the newly introduced
ones (Table 4). This was achieved through pro-
cess facilitation by setting initially a 5-year vision
for each measure, defining an initial benchmark
and then creating targets for each intervening year.
However, at the point of writing, the ILU measure-
ment approach had not been fully developed and
so targets could not be assigned. The staff felt that
this was helpful in helping to set firm direction for
them.

Table 4
Key business measures and targets
Key performance indicators (KPIs) Unit Targets Vision, 2006

2001 2002 2003 2004 2005

Gross profit/new car % 2.0 2.3 2.6 2.9 3.2 3.5

Gross profit/used car % 7.0 7.6 8.2 8.8 9.4 10.0
Finance penetration new cars % 23.0 23.0 23.0 23.0 23.0 23.0
Finance penetration used cars % 16.0 17.8 19.6 21.4 23.2 25.0
Administrative expenses % 0.9 1.0 1.1 1.0 0.9 0.9
Market share: region vs. national % 6.8/6.8 7.0/7.0 7.3/7.3 7.5/7.5 7.8/7.8 8.0/8.0
Retention new: first service % 80 80 80 80 80 80
Retention new: 3 years % 30 36 42 48 54 60
Retention used: first service % 25 26 27 28 29 30
Return on total turnover % 1.4 1.9 2.4 3.0 3.5 4.0
Volumes: new cars # 550 580 610 640 670 700
Volumes: used cars # 270 296 322 348 374 400
Service parts absorption % 60 68 76 84 92 100
Stock turn: used cars # 8 8 8 8 8 8
Stock turn: parts # 7.9 8 8 8 8 8
OCE: new cars % 39.5 41.0 42.5 44.0 45.5 47.0
OCE: used cars % 38.4 45.6 52.8 60.0 67.2 74.5
OCE: service % 51.1 55.2 59.3 63.4 67.4 71.5
ILU skills/competency %
714 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
4.2. Customer understanding
This part of the study sought to understand what
the customers really wanted from the retailer from the
three key business processes responsible for delivering
new and used car and after-sales service. As a result
it helps to validate how sensible the existing business
strategy is and whether it is related to true customer
needs. In addition it can also help suggest how this
strategy may be achieved.
From the results of this research element, it is clear
that new and used car buyers seem to have very sim-
ilar requirements. The Mann–Whitney test confirms
that the two groups differ in a significant way in
only a few attributes (in particular, for price, payment
terms, order-delivery lead time, and dealer facilities).
Results are shown in the relevant value attributes pro-
file of the nine main factors based on a 1–5 Likert
scoring scale (Fig. 2). There are some minor differ-
ences between the two sets with used cars buyers
being more price and payment term conscious. New
car buyers are more focused on the retailer’s staff,
facilities and after sales service.
If we consider that the dealer reputation, the staff,
the facilities and the service are directly controlled by
the dealership (at least, much more than product char-
acteristics, price, payment terms and brand), these
Fig. 2. Key customer value attribute scores for new and used cars.
findings suggest that the analysis and development of
the internal processes (especially after sales service)
might prove beneficial. In fact, the staff and the service
activities are main determinants of the process flows
investigated through the ‘lean management’ tools.
Moreover, the entire service process could become the
target area for continuous improvement programmes,
with strong impacts on time, quality and costs. Thus,
this marketing analysis is starting to shape the future
direction of the firm by highlighting the strategic role
of servicing in the customer’s choice of a dealership.
Cluster analysis of these results showed that it was
not possible to split the customers into many sig-
nificant clusters, as they already represent a specific
homogeneous group: customers of the same strong
brand. Indeed, >90% of the customers could be seen
to be in the main cluster. In addition, no significant
differences were found depending on the final use of
the car or the reason for its purchase. Thus, in order
to obtain a real understanding of the different car seg-
ments it would have been necessary to extend the sur-
vey to the entire car buying market, a survey beyond
the scope of this work.
Therefore, it is possible to compare only two sig-
nificant clusters. While the biggest one (over 90% of
customers) tends to give a higher importance to every
attributes and, in particular, to the dealer reputation,
 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
Fig. 3. New car value attributes importance vs. satisfaction.
the staff and the after sales service (areas that the
firm can control), the second largest cluster (5% of
customers) gives greater precedence to product char-
acteristics and the price (areas that the dealer cannot
greatly influence). This consideration again supports
the proposition that a better management of the inter-
nal processes can affect the perceived customer value.
If we consider the customer satisfaction level, a very
similar position is seen between new and used car buy-
ers, the former of which is shown in Fig. 3. There is a
generally lower score for satisfaction than expectation
except for payment terms. However, of more impor-
tance is the gap between satisfaction and expectations.
Given the perceptual nature of data, inferences should
be made with care with minor differences treated with
some scepticism. However, both for price and after
sales service there is a gap in excess of one Likert
point and so these could be considered to be the most
important gap areas. The dealer has very little control
over the former of these but a great deal over the latter.
With regards to ‘after sales service’ (Fig. 4), the
position is a little different. Here, the retailer does not
fully meet the customers’ expectation anywhere. Of
the nine most important value attributes in this area
quality appears to be most critical. The largest gaps are
in quality, price, dealer reputation and availability of
courtesy car. Arguably, each of these is largely under
the direct control of the dealer.
715
4.3. The lean and strategic cost management
perspectives
On the basis of the outcomes reported above, the
mapping work allowed the main activities inside the
new car sales, used car sales, and service processes to
be understood. Fig. 5 provides an example of the ‘big
picture’ map (Rother and Shook, 1998) for the new car
sales processes. This map starts with a customer pull
in the top right hand corner. The flow of information
from the customer then continues left along the top of
the figure. On the right hand side of the figure, this
information is seen to trigger some physical activity
such as the sourcing and delivery of the car, which is
shown graphically down the left hand side. The phys-
ical product is then depicted as moving back towards
the customer left to right along the bottom of the fig-
ure. In summary, the average total time from order
to delivery of each of the processes is: 14.6 working
days for new cars, assuming they are sourced from the
‘area storage centre’, 12.8 days for used cars and 3.6
days for services.
The ‘big pictures maps’ represented only the high-
est level of each process, whereas much more detailed
data capture was carried out using ‘process activity
mapping’ (Hines and Rich, 1997). An example of a
‘process activity map’ is shown in Table 5. These de-
tailed maps of the process, along a well established
716 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728

Fig. 4. Service value attributes importance vs. satisfaction.

procedure (Bicheno, 2000), are used to classify each
activity step into the following areas: operation (O),
inspection (I), delay (D) and transport (T).
In the normally internally-focused engineering ap-
proach, operations are assumed to be the only area
that can add value and are generally associated with
physical product transformation such as welding two
pieces of metal together (Bicheno, 2000). However, in
a process-based approach in a service or retail arena
the method needs to be modified in both language and

Fig. 5. The new car big picture map.

 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728 717

Table 5
An example of a process activity map: car collection and work division
Customer comes through the door Flow Activity Area Distance Time People
(O/T/I/D/D ) (FVA/VA/SA/W) (m) (min)
Customer arrives to service desk and sits T SA Showroom 20 0.25 1
Customer waits D W Showroom 0 2 1
Identify the customer I SA Showroom 0 0.5 2
Control if job card information are correct I W Showroom 0 2 2
Customer signs O SA Showroom 0 0.1 2
Collect customer’s keys O SA Showroom 0 0.1 2
Arrangement to return car I SA Showroom 0 1 2
Write arrangement on job card O SA Showroom 0 0.25 1
Find a place for job card D W Showroom 3 0.5 1
Waits for workshop controller D W Showroom 0 120 0
Checks job cards I W Showroom 0 0.5 1
Define who is going to do the service O SA Showroom 0 0.1 2
Up-dates time sheet O W Showroom 0 0.1 1
Hand out work between technicians T SA Showroom/ 20 2 2
workshop
Total 43 129.4 20

Note: W, waste with cost implication; W , waste with time, but no cost implications.

customer focus. In terms of helping to decide whether
an activity is useful or not in the eyes of the customer,
we have further classified them into: VA, future value
adding (FVA), supporting activities (SA) and W.
The VA include activities that are useful for the cus-
tomer today such as replacing a worn fan belt. Other
activities may not add value now but will in the future,
such as providing a potential customer with specifica-
tion details of a car they are interested in buying. The
SA (termed ‘necessary non VA’ in the engineering lit-
erature: see Bicheno, 2000), are necessary within the
current process, but do not directly add to customer
value and might include checking a variety of sourc-
ing options for a given car. These activities are per-
haps “inefficient” rather than wrong and are the target
of improvement, reduction or replacement, perhaps in
the medium to long term. Activities described as W are
completely non VA and should be the target of short
term elimination. An example may be trying to find a
pen when one is not readily available when taking a
telephone order. This is not only wasteful, but may be
highly annoying to the customer. This new language
was also more closely aligned with that used within
‘strategic cost management’ (McNair et al., 2001a).
Consequently, starting from the picture provided by
the very detailed ‘process activity map’ and the cost
information already available from the firm’s account-
ing system, it has been possible to obtain the cost of
the activities inside every department. Table 6 shows
an example from the ‘service and parts’ department.
The activities reported are the same as those de-
scribed in the ‘big picture map’ (Fig. 5). The profile of
VA, FVA, ‘SA and W’ provided by the detailed ‘pro-
cess activity mapping’ for each main activity can then
be applied to the macro-level, as shown in Table 7.
As can be seen, the value profile of the activity “car
collection and work division” (Table 5) is reflected by
the respective distribution of the labour cost between
VA, FVA, SA and W in Table 7.
Table 8 presents the time and labour cost related to
each of the three processes under study. In each case
“Delay” represents approximately 98% of the time
within each process. This 98% figure is very similar
to that in other manufacturing firms and their supply
chains (Hines et al., 2000). Indeed, as the 98% result
is found so often, it may be possible to define a “98%
delay rule” for unimproved internal or external supply
chains. Of the remaining time, approximately half is
for ‘operation’ in each process and half for other ac-
tivities. This result shows that each process has con-
siderable scope for time compression. However, in the
case of new cars, a considerable part of the ‘delay’
is caused by the customer themselves (and thus could
be excluded from consideration in a time compression
718 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728 719

Table 7
The labour cost of a typical service
Activities performed (in £)

VA FVA SA W Total

Understanding required and booking 0.64 55.1% 0.02 1.6% 0.23 19.7% 0.28 23.6% 1.17 3.1%
Prepare service job cards 0.00 0.0% 0.00 0.0% 7.70 75.5% 2.50 24.5% 10.20 27.3%
Check parts and pre-picking 0.00 0.0% 0.00 0.0% 0.48 72.2% 0.19 27.8% 0.67 1.8%
Car collection and work division 0.00 0.0% 0.00 0.0% 0.79 58.1% 0.57 41.9% 1.36 3.6%
Mechanical work 7.51 42.2% 0.00 0.0% 6.66 37.4% 3.63 20.4% 17.79 47.7%
Valeting service 1.26 66.0% 0.00 0.0% 0.65 34.0% 0.00 0.0% 1.91 5.1%
Customer collection and payment 0.00 0.0% 0.00 0.0% 3.85 91.3% 0.37 8.7% 4.22 11.3%
Total 9.41 25% 0.02 0% 20.36 55% 7.53 20% 37.31 100%

programme). Thus, the ‘delay’ time can be subdivided to minor damage such as dents or what the staff called
as follows: 49% ‘customer delay’, 23% ‘dealer delay’ “undulations”) and that around a sixth of cars are re-
and 27% ‘manufacturer delay’. turned with warranty claims. In addition, 1 in 20 cars
In terms of VA (present or future) both the new have to be returned for further rework after repair or
and used car processes show a result of just over 50% servicing. Fig. 7 illustrates the seasonal nature of sales
meaning that only half of the labour costs associated due to the UK registration system and Fig. 8 shows a
with these processes is valued by the customers. In new tool, the ‘sales acquisition funnel’ derived from
the case of the service process this value-adding figure the ‘product variety funnel’ (Hines and Rich, 1997)
falls to a quarter, meaning that there is considerable which demonstrates the percentage of customers re-
scope for process improvement here. tained at each stage of the sales acquisition. This high-
Other ‘value stream mapping’ tools can explore lights the key importance of getting customers seated
this position further. The ‘delay filter map’ (Fig. 6), or behind the wheel on a test drive. The reason why
for instance, shows the percentage of incoming cars there are more customer at the negotiation point than
that are delayed due to the manufacturer (20%), inter- at the test drive stage is that not all customers take a
nal delays (2%) between different departments (PDI: test drive before starting negotiations.
pre-delivery inspection and valeting) and the percent- Further detailed analysis also allowed for the de-
age of cars delivered late to the customer (15%). The scription of other sub-processes such as ‘car move-
‘quality filter map’ (Fig. 6) shows that there is a serious ments, ‘job card management and quality inspections’.
issue concerning incoming quality of cars (mainly due This detailed approach aims to increase the rigor of
the research, as it highlights “. . . when an activity in-
volves hand-offs from one department to another, and
Table 8 when an activity is highly fragmented, involving peo-
Time and cost profiles ple from several different departments performing var-
New cars Used cars Service ious or even the same aspects of the activity” (Kaplan
and Cooper, 1998, 141 pp.).
Time profile
The cost analysis attempted to estimate the global
Operation (%) 0.8 1.6 1.0
Transport (%) 0.3 0.5 0.7 process costs (Fig. 9), matching the ‘big picture’ infor-
Inspection (%) 0.4 0.6 0.5 mation (Fig. 5) and the department activity cost pro-
Delay (%) 98.5 97.3 97.8 files (Table 6). In this way, labour costs can be assigned
Cost profile to the different areas of the process to generate a type
VA (%) 38.8 5.7 25.0 of ‘process-based costing’. Using this data it is also
FVA (%) 14.6 38.5 0.0 possible to compare the cost of a single vehicle sold.
SA (%) 40.9 48.3 55.0 Taking into account unused capital and labour (espe-
W (%) 5.7 7.5 20.0
cially sales staff) capacity it is possible to simulate the
720 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728

Fig. 6. Quality and delay filters.

Fig. 7. The registration system effect on the dealer.

Fig. 8. The sales acquisition funnel.

 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728 721

Fig. 9. Costing the new car process.

effects on unit costs and on the operational margin of a
volume increase. Fig. 10 provides an example. While
the first row shows the operational internal cost of a
single vehicle sold with reference to the actual num-
ber of sales, the second and the third ones consider
a 10% sensitivity analysis around this figure (within
current capacity limits). Although this approach was
time consuming for the researchers and staff involved,
it was well received and a very high level of access
was maintained throughout, although research activity
involving the dealers’ staff was curtailed at busy times.
4.4. Business strategy validation and action planning
At the completion of the operational level data cap-
ture and analysis, the researchers, with a university
industry expert, facilitated a strategic level discus-
sion with the firm’s senior managers. This initially in-
volved feeding back the large amount of data that had
been captured (only a fraction of which is presented
here). After this various opportunities were identified
in terms of: ‘value creating’ (VC) in the eyes of the
customers, waste reduction (WR) from the existing

Fig. 10. The impact on the unit cost of different level of capacity utilisation.
722 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
Table 9
The strategic change programme
Value creation
Used car loyalty scheme
Service customer care
Service pricing including courtesy car
Used car replacement cycle
Waste reduction
Scheduling of service bay including PDI
Scheduling of valeting
Right first time lean servicing
Infrastructure
Annualised hours
Measurement scheme
Skills/competency scheme
External
Improved supplier new car OTD cycle
processes, developing the firm’s infrastructure (In) and
external (Ex) supply chain change.
The details of these different programmes are given
in Table 9. It should be noted that a major focus here,
particularly in the WR area, is in the service processes,
particularly where it interacts with the other processes
and causes a bottleneck. The two primary bottlenecks
where the processes interact are in the service bay and
valeting.
In order to validate the targeted strategic plan
(Table 4) it was then necessary to see whether the
different improvement projects were likely to deliver
the required results. The results of this are shown
in Table 10. On the left hand side are described the
various KPIs and for simplicity only the current and
3 years targets for each. The different proposed im-
provement projects (in the four above categories) were
assigned across the top. Each of these was assessed
by the whole team on a subjective 1–5 scale for ease
of implementation based on technical difficulty and
size of task. Each potential project was then assessed
on a zero to three star scale as to how likely it was
to deliver results against each KPI. In the case of
‘administrative expenses’, several of the programmes
were judged to create a negative impact as expected
under the targeting model (Table 4).
At the conclusion of this process the chart was sense
checked for validity. The senior staff from the dealer
felt that it was appropriate and that subsequent projects
would indeed deliver within a 3-year period. In order
to turn this rough cut project plan into a more de-
tailed time phased implementation plan, each project
was assigned a timescale: just do it (JDI)—within 1
month, short term (ST)—within 3 months, medium
term (MT)—within 18 months and long term (LT)—
within 36 months.
In order to complete the planning phase the re-
searchers took this outline plan and estimated the
‘profit potential’ of this activity using the earlier fi-
nancial and simulation information. The term ‘profit
potential’ was borrowed from McNair (1994), where
she used it to describe the amount of resources a firm
can generate by reducing or eliminating SA and W.
In this context, we will take a broader definition of
‘profit potential’ to include the results of any activ-
ity (either on the demand or supply side) that can
change the propensity for profitability of the focal
company whether it is under their direct control or
not. Four categories of ‘profit potential’ were defined
(Fig. 11), each of which would have a contribution to
increase the value to cost ratio customer proposition.
In Fig. 11, a simple plot of ‘customer perceived value’
against ‘cost’ (including W) is given. Any proposi-
tion that provides more perceived value than the cost
of providing it will be above the diagonal line. As a
rough approximation, the further the customer propo-
sition lies perpendicular above the line, the better the
proposition and the more likely the firm is to be gain-
ing competitive advantage and consequent market
share. In this case, the retailer was already increasing
its market share and so it may be considered to be
starting at point “X”.
The first effect is concerned with “reduce internal
W” by leaning the internal processes. This will lead
to a leftward move (arrow 1) in Fig. 11 as cost and
W are reduced. The second effect (arrow 2), “develop
customer value” adds to the customers’ perception
of the product/service provided by the retailer and
so represent an upward movement in the figure. As
a result of these two effects, market share should be
increased. However, there will also be a secondary
‘multiplier effect’, shown as arrow 3 in Fig. 11. This
‘multiplier effect’ is due to interaction between the
three processes. Thus, for instance, if the dealer in-
creases market share by selling more new cars, a
secondary effect, cet par, is that it will increase the
number of cars serviced. Likewise, retaining more
customers for longer by providing a better service is
P. Hines et al. / Journal of Operations Management 20 (2002) 707–728 723
724 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728

Fig. 11. Value and cost profit potential profile.

likely to lead to an increased retention rate for these Table 11

customers when buying their next new or used car. The profit potential
All three of these effects can be regarded as a result Level Type Value (£) Percentage
of the planned improvement activity. 1 Internal waste reduction 49.6K 32
The last effect “brand development” is an indepen- 2 Customer value added 62.5K 41
dent effect due to the estimated future increase in the 1–2 Annual profit potential within 112.1K 73
manufacturer’s brand into the UK market. This ef- 18 months
fect, although real, is not caused by the firm’s im- 3 Multiplier effects 43.2K 28
4 Increased market share, 2004 81.8K 53
provement activity. As a result its benefits (as shown 1–4 Annual profit potential within 237.1K 155
in Fig. 11) should be excluded from any analysis of 36 months
‘profit potential’ from the planned improvement work.
This is an important point as it is often difficult to split
this effect, post hoc. 5. Discussion
The first two sets of improvements “reduce internal
W” and “develop customer value” were judged by the The primary aim of this research has been to solve
team largely to occur in the 0–18 months period. In a particular problem at a specific car retailer, namely,
terms of the first of these, it was decided, on the basis how to develop a framework for implementing a
of conservatism, not to include all possible gains but lean approach. In addition, a wider objective was to
only 50% of those possible gains available by elimi- develop, test and if possible validate an integrative
nating “SA” and “W”. The ‘profit potential’ of these approach that seeks to gain a more holistic and contin-
effects is shown in Table 11 and can be seen to be very gent decision making approach that would help answer
substantial compared to existing profitability within some of the concerns presented in the OM literature
the dealer. about a lack of empirical testing (Pannirselvam et al.,
The third and fourth effects are judged to occur 1999; Ward and Duray, 2000). In order to do this a
in the longer term (18–36 months), although some single case study was chosen due to the expected com-
of the multiplier effect may occur earlier than this. plexity of the research and volume of research time
Again the ‘profit potential’ of these effects is given in that would be required. The individual results of the
Table 11. Taking away the fourth effect, the result of case itself will be of interest to students of automotive
the improvement activity has been simulated to more retailing, and may well have a more ready applica-
than double the dealer’s profitability within a 3-year bility to other organisations in automotive retailing.
period. This result clearly was highly motivational for However, what we believe is readily generalisable is
the senior managers at the dealer. the generic methodology that has been applied here.
 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728 725

Fig. 12. The research model.

The general approach sought to integrate four dis-
tinct research approaches (Table 1) into an holistic
methodology that is depicted in Fig. 12. This in-
volved developing a business strategy and ‘policy
deployment’ approach. This set the direction for
change and answered the what question. After this
a detailed understanding of customer requirements,
process activities and process costing was undertaken
and potential opportunities were established, thus, an-
swering the how question. These potential opportuni-
ties were then matched with the set of desired results
in order to develop a highly appropriate implementa-
tion framework that more than met the expectations
of the dealer. An assessment of the general effective-
ness of this approach is provided in Table 12, details
of which will be discussed below.
5.1. Integration of approaches
The first area of discussion focuses on how effective
was this integration process as a research method. It
was judged that this pilot study was effective in terms
of integrating the language used, the cultures of the
research team and the functional specialisms of the
researchers as well as providing a strategic framework
for the firm involved. An example of the effectiveness
of the approach was the evolution of some of the ‘lean,
strategic cost management and marketing’ language
and definitions to a common lexicon for this service
industry case. Specifically the team developed the ‘VA,
FVA, support activity and W classification’. The use
of FVA, for instance, recognised the importance of the
future revenue stream to the firm and its marketing

Table 12
Review of research approach
Research area Benefits Limitations

Integration of diverse research
approaches
Practicality of approach
Contingency of approach
Provided robust integration of language,
cultures and functional areas
Triangulation between different approaches
Highly practical approach
Integrated strategy and operations across functional divides
Beneficial to dealer as a framework for improvement
Provided a highly contingent and focused result
Provided a replicable research framework
Potential problems of reflexivity
Was process-based costing sufficient?
Time consuming for researchers and
case firm
Difficulty in obtaining data
Difficult to generalise specific results
to other dealers, sectors, cultures
726 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
connotations, an area absent in the traditional ‘lean
thinking’. Similarly, the change from the engineering
term “Necessary non VA” to “support activity” was
both less intimidating to the case firm and less value
laden. In addition it allowed for triangulation between
the different approaches allowing for a richer and more
reliable set of findings.
The other major area for integration was that of
the cultural and functional backgrounds of the re-
search teams. The research was carried out in Wales
with a research team drawn from the UK (England
and Wales) and Italy. The research team from the UK
were from a supply chain, marketing and OM back-
ground and had a wealth of experience in the automo-
tive industry, although considerably less in retailing.
The background of the Italian researchers was from
an accounting background and their general indus-
try background ranged from extensive to low. None
of the Italian team had a significant research back-
ground in the automotive industry. In spite of these
differences the research team worked very effectively
and was able to adopt a process rather than functional
perspective.
This research integration and application did how-
ever lead to, or at least highlight, a couple of limita-
tions of the approach. First, as the approach was an
‘action research’ case approach, the researchers were
generally leading the research process and on some
occasions, acting as expert facilitators. As a result the
work suffers from some reflexivity, which would be a
serious concern to fellow researchers taking a less pos-
itivist stance than the present team (Wass and Wells,
1994). In addition, there was some concern that a
purely ‘process-based costing’ approach did have cer-
tain limitations as it did not directly account for the
cost of non-productive time, for instance among the
sales staff. In addition, to some degree, it conflicted
with the organisational structure that existed in the firm
which was functional in nature. Consequently, the re-
searchers decided within the case study to rely also on
elements of other more traditional overhead allocation
approaches (Kaplan and Cooper, 1998).
5.2. Practicality of approach
As shown in Table 12, the approach was judged by
the researchers and researched to be highly practical. It
proved to be very effective in integrating the strategic
and operational perspective and focusing internal pro-
cesses along customer VA lines. It certainly helped to
break down departmental barriers. The feedback from
the senior managers in the dealer was very positive.
They have adopted the findings as a strategy for the
achievement of their ‘critical success factors’.
However, as is often the case with such case re-
search, the work was very labour intensive for the re-
searches and managers within the dealer. One of the
reasons for this was that, in some cases, it was diffi-
cult to obtain reliable data as a number of areas that it
was decided were important to the success of the or-
ganisation were simply not being measured. This may
partly be due to the fact that the dealer, along with
most other automotive retailers, is at a power disad-
vantage to the car manufacturers (Cox et al., 2000).
Consequently, what they measure can reflect what the
manufacturer wants done rather than what the dealer
should do. However, as a result of this work, at least
in this case, this problem has been corrected mean-
ing that a subsequent re-evaluation of this case firm
would be considerably easier and quicker. As a result
of the researchers’ (double loop) learning curve on us-
ing the approach they would also be able to implement
the approach in a further case in considerably less time
(Senge, 1990).
5.3. Contingency of approach
An interesting feature of the work is the very high
degree of contingency that was exhibited in the re-
search, not only customer and dealer contingency, but
also the time and detailed research approach taken in
this case. An example of this was that meetings were
generally constrained to about 2 h in length due to the
very small number of staff in this organisation and the
key role played in the organisation by the two senior
managers. This contingency however, means that the
detailed findings are specific to this particular case.
However, the research team did deem that the gen-
eral research method illustrated in Fig. 12 could be
applied in a wide variety of other environments. In-
deed, this wider generality of research method is felt
to be a strength here and helps to validate that what
is termed here the strategic level and operational level
can indeed be effectively combined within an empiri-
cal environment rather than just at a theoretical level
(Pannirselvam et al., 1999; Ward and Duray, 2000).
 P. Hines et al. / Journal of Operations Management 20 (2002) 707–728
Further testing of the approach in other environments
is ongoing.
6. Conclusions
The main conclusion from the work is that the inte-
grated empirical research method applied to this case
company has, on balance, proved to be a success. It
was robust as an integrated methodology, as a practical
toolkit and as a contingency approach. The integration
of ‘lean thinking, strategic cost management, market-
ing and policy deployment’ has, therefore, proved to
be effective at both the strategic and operational levels.
However, this initial work has suffered from a number
of limitations, not least its time consuming nature.
Further research is required in order to try to correct,
or at least restrict, these limitations. This should in-
clude further integration of other elements of ‘strategic
cost management’, such as cost driver analysis (Shank
and Govindarajan, 1993a,b). Also, of benefit would be
longitudinal research on the case firm described here
to observe whether they can fulfil the potential of their
improvement plans. In addition, further testing of the
approach in other automotive retailers, industrial sec-
tors and outside the UK will help to gauge whether the
approach can overcome cultural and sectoral institu-
tional barriers (DiMaggio and Powell, 1983; Hofstede
and Bond, 1988; Whitley, 1992). Once the approach
can be further streamlined it can also be applied to a
wider supply chain setting.
Acknowledgements
The authors would like to also express their thanks
to the following for their assistance and input during
the course of this research: Chris Butterworth, Gavin
Cleverly, Giacomo Iannelli, John Kiff, Valentina
Rancati and Andrea Raschi.
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