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

Thursday, June 28, 2012

Focus and Leverage: Focus and Leverage Part 128

Focus and Leverage: Focus and Leverage Part 128: If you’re in the consulting world or even just in business making products, did you ever wonder why some companies seem to get more than t...

Focus and Leverage Part 128

If you’re in the consulting world or even just in business making products, did you ever wonder why some companies seem to get more than their fair share of business?  We seem to always be looking for ways to get more business and make more profit for our companies.  What if there was a method for assuring that your business was able to bring in more work than you ever have in the past?  Would that be of interest to you?  Success in your business is not a matter of beating the price or service of your competitors, but what is the key?  This posting is all about something we call in the TOC world a mafia offer.  No, not going out and hiring gangsters to get you more business….not that kind of mafia.  A mafia offer is all about increasing the value of your product or service….an offer that your customers simply can’t refuse.  Sound interesting?

A mafia offer is an offer that is not difficult to construct and if it’s done correctly you could reasonably expect an 80% offer closing rate.  So let’s talk about the basics of mafia offers and how the Theory of Constraints enters this discussion.  Once again it was Dr. Goldratt who developed the mafia offer back in the 90’s.

Many of my blog postings have been about TOC and I’ve said many times that there is always an internal or external constraint that is limiting your system’s performance when compared to your stated goal.  I’ve told you that the key to profitability is not through how much money you can save, but rather how much you can make.  One of the keys to the mafia offer is creating a proposal that seeks to maximize your client’s profits by identifying and focusing on your client’s system constraint.  The mafia offer is intended to remove or diminish the effects of the system constraint and demonstrate more value for your products or services…..and for sure much more value than your competitors.

The presentation you make to potential clients is really the key to the mafia order, but you must know your industry inside and out.  You must understand your own capabilities and those of your competitors.  My advice is to follow a very simple presentation format like the following:

1.    Using a very simple Power Point presentation, I recommend that you start with an overview of problems within the industry and not the typical company background that most presentations include.  They are very boring!  Clients want to know right away what you can do for them.  Show them the negatives from your industry and watch to see if heads are bobbing in agreement.  Start with things like typical lead times, minimum order quantities, high inventories, on-time deliveries, etc. that demonstrate how the industry’s current practices are hurting their business.  Stop every once in a while and ask them if they are feeling these negatives in their business.  What you’re doing here is getting them to agree on the problem.

2.    The next step is to get the potential customer to agree on the general direction of the solution.  Start with something like, “So how do we fix these problems?”  We are attempting to describe what life would be like if we had solutions to these problems in place.  In this step we are developing, with the client, what the basic criteria for the solutions would look like.  When this is complete, we present an overview of our offer first and then in a bit more detail for each of the solution criteria.  Keep it very simple, but it’s important to provide to explain the results they will experience.  When you’ve finished this part, ask the potential client if they believe the offer you have presented, the solutions, will solve the problems they are facing every day.  You’re looking for agreement here.
3.    The next step is to draw a comparison between your company and the competitors…a contrast if you will.  Here is where you offer proof that your solution will work by presenting relevant case studies from clients you’ve already served and delivered for.  This is the central core of your mafia offer.  One key point is the advantages that you are presenting must clearly be significantly greater than the cost of your product or service.

4.    Finally it’s time to close the deal, but keep this simple too.  I recommend that you repeat your offer with specifics like, “Our offer will slash your lead times by “x” days or weeks, improve your cash flow, reduce your inventory by “x” % while eliminating stock-outs, etc. or whatever you truly believe will happen if they accept your offer.  Be bold and ask the potential client what they think?  If you get a positive response, you’re most probably looking at a contract, so ask them what the next steps are and then let them tell you what they are.

The key to remember is that a mafia order will be something that your competition can’t, or is unwilling to, match at least in the short term.

Bob Sproull

Thursday, June 21, 2012

Focus and Leverage Part 127

I recently received several emails requesting that I post a historical index of my blog postings.  The reason behind this request was so that when a reader wanted more information on a particular subject that I’ve posted here, it would be easy to find.  So listed below is that index.  You simply search for the post number and subject you’re interested in from the index and then find it in my postings.  For example, if your interested in reading about Throughput Accounting, it would be found under Focus and Leverage Part 4.  I hope this helps.

Post #            Subject Discussed

1.    Introduction to TOC – Lean – Six Sigma

2.    Why Improvement Initiatives Fail

3.    The Basic Concepts of TOC

4.    Throughput Accounting

5.    The Process of On-Going Improvement (POOGI)

6.    The 3 Cycles of Improvement

7.    Combining TOC, Lean and Six Sigma Graphically

8.    Step 1a Performance Metrics

9.    Planning Steps 1b and 1c Reducing Waste and Variation

10. Developing a Constraint’s Improvement Plan

11. This number was skipped

12. Steps 1b and 1c Reducing Waste and Variation plus an intro to DBR

13. Drum-Buffer-Rope

14. The Final Steps of UIC

15. How do I start the UIC?

16. The 10 Prerequisite Beliefs

17. Comparing Lean, Six Sigma and TOC

18. Types of Constraints

19. The Logical Thinking Processes

20. Undesirable Effects (UDE’s)

21. Categories of Legitimate Reservation

22. Current Reality Trees

23. Constructing Current Reality Trees

24. Conflict Diagrams Basic Principles

25. Constructing Conflict Diagrams

26. Intro to Future Reality Trees

27. Constructing Future Reality Trees

28. Prerequisite Trees

29. Constructing Prerequisite Trees

30. Transition Trees

31. Constructing Transition Trees

32. Book Announcement

33. Project Management Failures

34. Project Management Negative Behaviors

35. Critical Path Management (CPM)

36. Critical Chain Project Management (CCPM)

37. Tracking Projects In CCPM

38. Final Posting on CCPM

39. Intro to the TOC Parts Replenishment Model versus the Min/Max System

40. The TOC Parts Replenishment Model

41. Interview with Joe Dager from Business901

42. Deming, Ohno and Goldratt Commonality

43. Dedication to Dr. Eliyahu Goldratt

44. How processing time, cycle time, throughput and WIP are interrelated

45. Little’s Law

46. Batch and queue production system and the fallacy of a balanced line

47. Why an unbalanced line is better.

48. What prevents me from making more money now and more money in the future?

49. More on the 10 Prerequisite Beliefs

50. Motivating a work force to actively participate in improvement initiatives

51. Re-Introducing the Intermediate Objectives Map

52. Introducing Be Fast or Be Gone: Racing the Clock with CCPM

53. Parkinson’s Law, The Student Syndrome, Cherry Picking and Multi-Tasking

54. Overcoming the four negative behaviors in Project Management

55. Intro to combining the Interference Diagram (ID) and the IO Map

56. The Simplified Strategy

57. The Interference Diagram

58. Interference Diagram for Strategy

59. The ID/IO Simplified Strategy

60. Preface Part 1 for Epiphanized©

61. Preface Part 2 for Epiphanized©

62. CHAPTER 1 Part 1 for Epiphanized©

63. CHAPTER 1 Parts 2 and 3 for Epiphanized©

64. CHAPTER 1 Part 4 for Epiphanized©

65. CHAPTER 1 Part 5 for Epiphanized©

66. Focused Operations Management For Health Service Organizations by Boaz Ronen, Joseph Pliskin and Shimeon Pass

67. Marketplace Constraints

68. A Discussion on Variability

69. More Discussion on Variability

70. Still More Discussion on Variability

71. Paper from the International Journal of Integrated Care

72. Value Stream Mapping

73. Paths of Variation

74. Step 3, Subordination

75. The Key to Profitability:  Making Money Versus Saving Money

76. My First Experience With TOC

77. TOC in Non-Manufacturing Environments

78. Deborah Smith’s Excellent Chapter in the TOC Handbook (i.e. Chapter 14)

79. More on Performance Metrics

80. Efficiency, Productivity, and Utilization (EPU) ©

81. Productivity as a Performance Metric

82. Utilization as a Performance Metric

83. What the Dog Saw – Malcolm Gladwell

84. Speaking at the CPI Symposium – Cal State, Northridge

85. NOVACES – A Great Young Company

86. NOVACES’ SystemCPI©

87. Problems With My Publisher

88. The Why? – Why? Diagram

89. Experience With the Integrated Methodology

90. A New Piping Diagram

91. The Healthcare Industry

92. More Bad News From the Publisher

93. A Message from the CPI Symposium

94. Multiple Drum-Buffer-Rope

95. Problem Solving Roadmap

96. Problem Prevention Roadmap

97. Improving Profitability

98. More on Throughput Accounting

99. More on Parts Replenishment

100.  TLS

101.  Engaging the "Money Makers" in Your Company

102.  A Conversation on the Theory of Constraints

103.  The Key to Successful Consulting Engagements

104.  The Three Basic Questions to Answer

105.  A Problem With the Airlines

106.  A Better Way to Improve Processes and Systems

107.  The Problem With Project Management

108.  Critical Path Project Management Revisited

109.  Critical Chain Project Management Revisited

110.  The Fever Chart

111.  Comparing CPM and CCPM

112.  Performance Improvement for Healthcare – Leading Change with Lean, Six Sigma and Constraints Management

113.  More on Performance Improvement for Healthcare

114.  Even more on Performance Improvement for Healthcare

115.  Still One More on Performance Improvement for Healthcare

116.  The Final One on Performance Improvement for Healthcare

117.  The Real Final One on Performance Improvement for Healthcare

118.  Focused Operation's Management for Health Services Organizations.

119.  Focused Management Methodology

120.  The Clogged Drain

121.  The “Soft” Tools of Improvement

122.  More on TOC’s Distribution/Replenishment solution

123.  Still More on TOC’s Distribution/Replenishment solution

124.  Amir Schragenheim’s Chapter 11 entry in the TOC Handbook

125.  Comparison of Lean, Six Sigma and TOC

126.  A Simple Lesson on Applying TLS to Your Processes

127.  A Historical Index of Blog Postings