Friday, June 29, 2012

Focus and Leverage Part 129

In my last blog posting I introduced the TOC based concept for significantly increasing your company’s sales volume known as the mafia offer.  I have to tell you that of all my blog postings, this one drew more attention, more page views than any other posting I’ve put forth.  It is clear to me that there is a significant interest in this subject.  So I’ve decided to run at least one more posting on this subject.  By the way, if you really want to learn more about mafia offers, read It’s Not Luck by Eli Goldratt and Chapter 22 TOC Handbook by Dr. Lisa Lang….both are excellent references.  Dr. Lisa has a superb consulting business and teaches people how to create mafia offers.  I actually borrowed heavily from her work in Chapter 22 of the Theory of Constraints Handbook in this post.  In addition I want to hyper link to Dr. Lisa's work and recommend if people want to learn more about mafia offers, read her works.  Here's the link:

One question that may be on the minds of many people is what part of the market segments your company is engaged in can you develop mafia offers for?  The simple answer I’d give you is that you could develop a mafia offer for all of your market segments if you wanted to.  You might consider things like which of our market segments deliver the best or worst margins?  Or maybe something like, do we have a market segment that has lots of room to grow and some that has no room to grow?  The fact is, there are lots of things to think about when you’re considering this kind of offer.  But the one key point driving the mafia offer is that it’s based upon having excess capacity.

If you face the following situations on a routine basis, then you are probably ripe to deliver a mafia offer:

1.    Your clients order the same product or service from different competitors because they want to be sure one of their suppliers delivers on time.

2.    Your customers are complaining about having too much inventory and frequent stock-outs.

3.    Your customers complain a lot about late deliveries.

4.    Your customers complain about the high cost of products or services.

5.    Expediting orders to meet due dates is common with your business and your competitors.

6.    Your customers or potential clients are ordering to a forecast.

If you think about what a mafia offer might look like for these situations, you ask yourself, “Can I make an offer that will take away that negative situation for my customer?  If you could come up with a way to counter your potential customer’s gripe, do you think your current and potential customers might flock to you with orders?  What if you could turn these negative situations into your advantage?  Let’s look at some simple examples of how you might create a mafia offer.

Let’s say you have a client whose business has very high levels of inventory, yet still experiences stock-outs of parts on a routine basis.  The way I would start off this offer would be with a statement of the known problem and it might look something like:

We know that in your business you have very high levels of inventory, but we suspect you have very frequent stock-outs of parts that stop your production process.  We would like to offer to manage the parts we supply to you.  This would mean you don’t have to place any orders to us, just send us your usage information every week and we’ll keep you stock levels where they need to be.  As a measure of our confidence, we will guarantee no stock-outs.  If we do cause a stock-out we will pay a $500 per day penalty for each day your parts are late.  We will also guarantee a 30% $ reduction in the number of parts we hold on site and you will only pay for what you use, so there will be no more obsolescence losses due to out-of-date parts.  We will basically offer our parts to you on consignment.

Another example of a mafia offer might be if there has been a problem with on-time delivery.  In this case, we might write the mafia offer a bit differently as follows:

We know that on-time delivery of parts from our company (and our competitors) has been a serious problem for your company.  We want to offer you a guaranteed on-time delivery for 100% of our parts.  Our offer is that if we are late with any order, we will give you a 10% discount for each day the order is late.  If the order is more than 5 days late, the entire offer will be free.  We are prepared to deliver new parts that we haven’t supplied to you previously and will honor the same offer for these new parts.

Let’s look at an example of a case where your company manufactures very expensive equipment that customers have been unwilling to purchase because of the price.  In this case you have the option of either leasing it to the customer or charging them so much per hour or day to use it as follows:

We know that in today’s economy capital expenditures are difficult so we want to offer you a different kind of deal.  Rather than purchasing our J58Z model, we are offering 2 different possibilities:

1.    Your company can lease the equipment for “x” $’s per month.

2.    Your company can agree to pay us “x” $’s per hour only when the equipment is used.

We know that this will allow you to keep your cash reserve in the event of serious problems that may arise.

And finally, what if your organization provides some kind of service such as a consulting company.  How might a mafia offer look here?

We know that most consulting companies charge by the day or hour plus travel expenses, but we have a problem with that kind of deal.  There is no guarantee that your company’s bottom line will improve.  While we would still require reimbursement for travel expenses, we would like to offer our services for a percentage of bottom line improvement.  If your bottom line doesn’t improve as a result of our services, then you would owe us nothing except travel expenses.

So in looking at each one of these mafia offer examples, do you think the company receiving the offer would jump at the chance to sign the deal?  I think they would!  In my next posting, we’ll talk more about mafia offers and what kind of acceptance rate you should reasonably expect to get.

Bob Sproull

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