Theory of Constraints Tips

Follow Dr Lisa on Twitter and get daily Goldratt Theory of Constraints (TOC) Tips.

http://twitter.com/TOCExpert

A Process Of On-Going Improvement (POOGI) - Part 42

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Maximizing Profits in Uncertain Times with Goldratt Theory of Constraints

Dr. Lisa Lang presented “Maximizing Profits in Uncertain Times” at the recently completed NTMA (National Tool and Machining Association) annual conference in California. (To review the presentation slides and/or view the complete presentation, check the link mentioned below at the end of this article).

Using the famous Theory of Constraints (TOC) analogy of a chain, “Dr. Lisa” described how the weakest link of a chain determined its ability to achieve its goal of holding weight. Any increase in the strength of any link—except the weakest—had no effect on the overall goal.

Similarly, the goal of a company is to make more money now and in the future. The weakest link in our company process—the constraint—determines the performance of the company: how much money it can make. So, we must focus on and leverage the constraint.

In this economy, the constraint your company is dealing with may have shifted. For many companies, the constraint has been in operations. You have been busy, trying to get out as much as possible, and were probably dealing with long quoted lead-times and poor due date performance because of the internal constraint.

Now, in these uncertain times, many companies are faced with not enough sales. In companies used to dealing with an internal constraint, the management team frequently lacks processes and intuition for dealing with lack of sales.

Dr. Lisa presented how to address lack of sales with a “Mafia Offer”, an offer so good your customers can’t refuse it, and your competitors can’t or won’t offer the same.

A Mafia Offer typically requires that you do something different (make operational improvements) to actually deliver something un-refusable to your customers and something that your competition can't or won't do because they are not willing to or don't know how to make the same improvements.

Most companies offer solutions that solve their customers various problems or symptoms. With a Mafia Offer we are addressing our customer’s core problem.

When you have a good Mafia Offer and you deliver it correctly, your close rate can increase to above 80%. If you close 80% or more of your prospects -- you have control over your sales. This control makes it easier grow and invest in your business while maintaining the ability to deliver the offer.

Mafia Offers are developed by analyzing 3 things:
1. What are (or could be) your internal capabilities compared to your competition,
2. How does your industry, you and your competitors sell what you sell, and
3. Understanding how your clients are impacted by your current capabilities (which are usually the same as your competitors) and how you sell.

To protect the confidentiality of machine shops that have already developed their own Mafia Offer, she used an example from the printing industry. Using the TOC scheduling methodology, this printer had reduced their lead-time to two days, relative to two weeks for competition. The printer worked with clients that reordered products infrequently, in order to minimize purchase price, due to the price-quantity curve used by all printers. Because they had to forecast future usage in order to determine the quantities to order, customers invariably had too much inventory of some SKUs while they stocked out of others.

With the caveat that no company that is in the tooling and machining industry should think this Mafia Offer work for them, she told the audience the printer’s Mafia Offer:

“Mister customer, don’t give me orders. Your orders are based on your best guess of what you might need. Instead tell us every day what you used. We will guarantee on the one hand that you will not need to hold more than 2 weeks of inventory so you have more marketing flexibility and less risk for obsolescence, and at the same time we will also guarantee that you will never run out. If we ever stock you out, we will pay you $500 per day per SKU.”

That’s a Mafia Offer – best of all worlds for your customer and the printer will not pay a penalty because it only takes 2 days to replenish. The competition can not offer the same thing because they can not consistently deliver in less than 2 weeks and they could not risk paying the penalty.

The remainder of the presentation was devoted to describing the operational and mind-set changes required to have such a powerful Mafia Offer. Dr. Lisa described how Drum-Buffer-Rope scheduling works, and how “Buffer Statistics” guides ongoing improvement by pointing process weaknesses that Lean and Six Sigma tools can quickly fix.

She also described how the Mafia Offer challenged prevailing assumptions about “set-up cost”. The offer would require many more set-ups, but the printer had significant excess capacity. So, in reality, there was no additional set-up cost. Yes, there was additional set-up time, but all the people were already paid for in that period. And by knowing the importance of set-ups to delivering their Mafia Offer, the printer used Lean tools to dramatically reduce set-up time.

To view Dr. Lisa’s presentation, go to the Velocity Scheduling System page and get on the waiting list -- you'll have instant access. .



...to be continued.



Here's to maximizing YOUR profits!



Brad Stillahn



(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 41

Use Internet Marketing to Increase Leads

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

The focus, priorities, and actions your company takes should be different depending on whether your company is internally or externally constrained. If your company can produce and ship 20 to 30% more sales with existing resources, it is externally constrained.

If you’ve determined that your company is externally constrained, you need a lot more sales and fast. That’s the focusing mechanism of Theory of Constraints (TOC). Your attention should be on getting more sales.

Let’s make some assumptions:
1. Your operations are 100% on-time (after all, you’re externally constrained, so you should have capacity to be on-time), and
2. You have determined your target market, and
3. Your conventional marketing and sales efforts are getting the results they are getting and you believe that won’t change much in the short-term, and
4. Your company’s products and capabilities are desirable to prospects if they just knew about them (you need more qualified leads), and
5. Your company has developed an un-refusable offer backed up by a guarantee (what we call a “Mafia Offer”), and
6. You can’t to afford to spend much.

What’s the one thing you could focus on doing that would bring the biggest increase in sales? These days, it might be effective Internet Marketing.

Start with free or low-cost approaches to get prospects calling you.

First, your website needs to be more that a picture of your building or an on-line brochure, and should be built around communicating your Offer.

Second, use Search Engine Optimization (SEO). Select keywords that prospects are likely to search on when looking for what your company does. Your goal is to be on the first page of search engine results for those keywords.

Third, commit to a consistent small monthly budget (for example, $500) for Pay-Per-Click advertising.

Consider the following case of a client of ours. The starting condition was that their website was just a picture of their building. They were nowhere to be found on the search engines. That is, if you didn’t know their website address, it wouldn’t show up on a keyword search. They had no database of prospects. They had no marketing or sales representatives. In summary, their basic approach was to let prospects somehow find them, which wasn’t working very well.

The first thing we did was change the front page of their website to communicate their Mafia Offer. Rather than depending on outside programmers, we used an easy-to-change website technology (for just $25 per month) that gave the client the ability to make changes and update the website themselves. Next, we recorded a brief video of the client describing their Offer with an inexpensive webcam. Then we sent the video, imbedded with the keywords we had chosen (in this case, one was “custom metal fabricated parts”), to all of the social networking sites. Literally within minutes, the client was on the first page of the search results! Why? …because the Search Engines love video.

In addition, the client began to systematically use Pay-Per-Click advertising for the same keywords.

With the combination of Search Engine Optimization and Pay-Per-Click, our client started getting between 10 and 20 visitors per day to their website.

When a prospect finds you, it doesn’t stop there. You have to provide value. Perhaps it is a white paper on a subject that your company is an expert. Offer the white paper in return for the prospect’s name and email address. Our client began building their prospect list, and then began sending everyone an email every other week on a relevant topic related to what they do.

What were the results? After spending only $110, the client landed an account worth $80,000 per month. For a small company of $2 million annual sales, that was cause for celebration! The prospect had found our client by searching on-line for the keywords, and had really studied the client’s site on several occasions to understand the Offer before they called to follow-up. When the prospect called the owner, they were ready to buy!

Once your company is successfully using Internet Marketing, there is more to do. Upgrading your website and videos is important. Relevant content for your prospect list is crucial. Emails, blogging and podcasting may be appropriate. We also recommend your company get a Facebook account.

Want more information? Please email and we will send you a brief paper with more detailed recommendations on how you can manage Internet Marketing yourself, along with some example videos.

...to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.

Stompernet Mafia Offer Presentation by Dr Lisa

If you want the PowerPoint slides from my Stompernet Live 8 (SNL8) Mafia Offer presentation, just click here: Dr Lisa Mafia Offer Stompernet Presentation

For more on our private or group Mafia Offer Boot Camps, please visit http://www.mafiaoffers.com/

For more on our ON-LINE Mafia Offer Boot Camp, please visit http://www.mafiaofferbootcamp.com/

A couple links that you may find of interest that Brad Fallon covered in his Stompernet Live 8 presentation:

Video overview on Critical Chain Project Management -->Critical Chain Overview

Report on how to do the T/CU calculation Brad Fallon did at the event -->http://www.informationoverloaddestroyer.com/

Books Mentioned:
The Goal by Eliyahu M Goldratt
It's Not Luck by Eliyahu M. Goldratt
The Choice by Eliyahu M. Goldratt
Critical Chain by Eliyahu M. Goldratt

Dr Lisa's Vistage speech, Achieving a Viable Vision (find out about T, I and OE)