Upcoming Theory of Constraints Events

1st Quarter Group Mafia Offer Boot Camp
- January, 30, 31, Feb 1 2008 in Denver
- February 25, 26, 27 2008 in Denver
- March 24, 25, 26 2008 in Denver
- More information at http://www.mafiaoffers.com/

NEW REMOTE (on-line) Mafia Offer Boot Camp
- Done at your own pace and time of your choosing
- One on One support provided by phone conferencing
- More information at http://www.mafiaofferbootcamp.com/

PRIVATE Mafia Offer Boot Camp
- Done at your location and at a mutually convenient time
- More information at http://www.mafiaoffers.com/

NEW Theory of Constraint PRICING Project
- We usually do pricing projects as part of larger results based consulting engagements, but because they have been so successful (typically 10 to 20% return on sales), we have decided to offer stand alone pricing projects.
- If you have not yet gone through “Pricing using Theory of Constraints”, please see: http://drlisamaxprofit.blogspot.com/2007/05/pricing-using-theory-of-constraints.html
- More information at http://www.scienceofbusiness.com/Default.aspx?tabid=144

Goldratt CCPM Webcast starting February 13, 2008
- Watch Goldratt LIVE or rebroadcast.
- Dr Goldratt will be covering, never before released knowledge using the Strategy & Tactics tree.
- There are five 2.5 hour sessions. There are a number of options for viewing the webcast with pricing from $350 to $2500.
- More information at http://www.scienceofbusiness.com/Default.aspx?tabid=140

Executive Access Boot Camp
- Feb 28, 29, and March 1 2008 in Denver
- March 27, 28, 29 2008 in Denver
- More information at http://www.executiveaccessbootcamp.com/

SPECIAL: Free Shipping on the live recorded 3 hr workshop “Achieving a Viable Vision”, send an email to order for $99 (regularly $199). For more information: http://www.scienceofbusiness.com/Default.aspx?tabid=133

How to Sell Your Mafia Offer - Part 10

Who should we target with our offer? and How should we roll it out?

STEP 3

Your marketing and sales core team generates a list of prospects for your mafia offer roll out:

• Mapping current prospective clients (existing, past, new) creating a wide list of prospects belonging to the preferred market sectors.
• Defining prospects for test launch (representative clients salespeople can approach as soon as possible); Prospects which are already in the pipe line and that are quite suitable for the offer; Existing clients with substantial business yet to be gained suitable for the offer; New prospects which are best suitable for the offer and have a short internal decision time.
• Defining prospects to become key accounts. Based on Returns: Barriers assessment, the company should focus its sales efforts on winning a big share of their business.
• Giving high priority to reduce the risk of losing key accounts.
• Warning: if a client is responsible for a high share of the Company business – do not increase its share.

If you follow the 3 Steps outlined, you now have a good list of prospects for both near term and longer term development.

In this 10 Part series we covered how to sell your mafia offer. How to present it, to whom to present it, how to get in to present it, who to target with your offer and what to watch out for along the way. The first step, however, is to create YOUR mafia offer. Mafia Offers were first introduced in Theory of Constraints by Eliyahu M Goldratt's It's Not Luck and you get some idea of how to create one. However if you need more guidance, you may want to consider a Mafia Offer Boot Camp!

Here's to Maximizing YOUR Profits!
Dr Lisa Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

NEW We have developed a REMOTE (on-line) Mafia Offer Boot Camp. Click here for an informational video and a FREE Preview of Session 1: http://www.MafiaOfferBootCamp.com/

Next GROUP Mafia Offer Boot Camp in the US is January 30, 31, February 1, 2008 in Denver. Sign up today, registration is limited to 5 companies. $10,000 per company.

How to Sell Your Mafia Offer - Part 9

We started this discussion about how people are more interested in avoiding (or reducing) pain than they are in increasing pleasure. We discussed how to present a Mafia Offer (based on Goldratt's Theory of Constraints) consistent with that desire.

Because mafia offers are business deals we also discussed how to get in to the right level to make your offer. See Executive Access Boot Camp below.

The next questions likely are: Who should we target with our offer? and How should we roll it out?

Here are some guidelines:

STEP 1

•Examine the different market sectors you serve, evaluating the extent which your mafia offer solves solves a significant problem for each market sector. What are the consequences of not solving that problem for each market?
•Examine 3 (prospective) clients per market sector (less than 3 may risk looking at extreme case, more are not needed).
•Based on the above identify the preferred market sector(s) to leverage YOUR offer.

STEP 2

Having looked at where the problem (that you solve) is the greatest, now let’s look at other considerations:

• Is there a market(s) that yeilds higher Throughput than others?
  Past experience can point to the type of clients/market-sectors/product-types that yield better Throughput. A particular client may yield less Throughput initially but would enable you to win good future business (penetrating a client, establishing reputation, gaining experience, steady annual income).
• Is there a market(s) that are more quickly accessed or has shorter sales cycles than others? Some big organization clients have decision processes which prolong significantly the sales cycle. To win the business of some types of clients/market-sectors/product-types, you may need to invest in qualification. In some regions/market sectors, you have much less sales infrastructure than in others.
• Is there a market(s) that are bigger than others?

Based on your answers to these questions, your marketing and sales core team should evaluate returns and barriers to create a proper sales plan - a plan that aims at increasing business in the short and medium horizon while preparing the ground for bigger sales in the future.

... stay tuned for STEP 3 in Part 10

NEW We have developed a REMOTE (on-line) Mafia Offer Boot Camp. Click here for an informational video and a FREE Preview of Session 1: http://www.MafiaOfferBootCamp.com

Next GROUP Mafia Offer Boot Camp in the US is January 30, 31, February 1, 2008 in Denver. Sign up today, registration is limited to 5 companies. $10,000 per company.

Next GROUP Executive Access Boot Camp is February 28, 29, March 1, 2008 in Denver.

$1,875 per person for all 3 days.

Here's to Maximizing YOUR Profits!

Dr Lisa Lang

(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

How to Sell Your Mafia Offer - Part 8

I ended Part 7 by asking -- Do people make decisions alone or in groups? If you had the experience I described in Part 6 where you do get in, but then have to come back and make the presentation multiple times until all the key people have seen it and can agree to go forward? Then you probably agree that your prospects make decisions in groups. And the larger the company, then the more true this seems to be.

Knowing that people make decisions in groups, why to we approach one prospect within our target company? In our 3 day Executive Access Boot Camp we discuss the psychology of this group decision making process and introduce a better way. We recommend approaching about 5 people depending on the specific situation. In addition to the ultimate prospect we also contact the next 2 levels up, 2 collegues, and 1 level below. We call each of these 4 people around the ultimate prospect leverage points. These are the people that, due to the psychology at play, will cause a meeting to occur. I can't possibly describe the whole 3 days, but you get the idea.

Here's what the Executive Access Boot Camp (EABC) has done for other companies that are closely held small businesses, midsized, and larger public or private organizations:

• Can reduce a companies time-to-a-deal by up to twenty-five percent
• Helps deliver faster assess to the senior executives of your key prospects
• Quicker determination of the prospect's interest in your offer
• Can increase annual revenues of five percent or more

You can read more about Executive Access at http://www.executiveaccessbootcamp.com/.

.... stay tuned for Part 9

Next GROUP Mafia Offer Boot Camp in the US is January 30, 31, February 1, 2008 in Denver.
Sign up today, registration is limited to 5 companies. $10,000 per company.

Next GROUP Executive Access Boot Camp is February 28, 29, March 1, 2008 in Denver.
$1,875 per person for all 3 days.

Here's to Maximizing YOUR Profits!
Dr Lisa Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

How to Sell Your Mafia Offer - Part 7

I will answer my own questions from Part 6 with the typical answers. Remember, that only those of you (30%) who are having trouble getting in will have similar (or any) answers.

So why is it so hard to get in, at the right level, to present your offer? What are the blockades you face?
Voicemail, caller ID, and assistants have made it easier to avoid contact. It seems that with all this technology it has gotten harder to get in.

What is the effect of all this? Longer sales cycles? Slower growth? Lower ROI on your sales/marketing investments?
Yes all of that, not to mention poor cash flow.

Do you have a solution to these challenges? Is there one? What do you do today -- what is your process to get in? Research -- letter -- call? What is the TOC solution?
We do the research -- letter -- call or just research -- call. Goldratt's Theory of Constraints doesn't really cover how to get in.

The assumption was that if you have a good, relevant market offer (mafia offer), then surely you can get it to present it. Right?

Who do you target -- what is the title of that person?
It depends on the particular client, but a common title is VP of Operations.

OK. So my next questions is -- Do people make decisions alone or in groups? What do you think? What's your experience?

.... stay tuned for Part 8

Next Mafia Offer Boot Camp in the US is January 30, 31, February 1, 2008 in Denver. Sign up today, registration is limited to 5 companies. $10,000 per company.

Next Executive Access Boot Camp is February 28, 29, March 1, 2008 in Denver. $1,875 per person for all 3 days.

Here's to Maximizing YOUR Profits!
Dr Lisa Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

How to Sell Your Mafia Offer - Part 6

Up to this point, let's say that 1) you have a great mafia offer based on Goldratt's Theory of Constraints ; and 2) you have a can't miss Solutions for Sales presentation. But in about 30% of the cases that is still not enough. Can you get in to make your presentation? And, can you get in at a high enough level for your business deal?

Have you ever had the experience where you established a relationship with the buyer or whoever your contact is and you get to the point where you get to make your presentation, but then you have to come back and do it again (and again) because the people in the room weren't the decision makers? Is there anything more frustrating when you have a market constraint?

So why is it so hard to get in, at the right level, to present your offer? What are the blockades you face?

What is the effect of all this? Longer sales cycles? Slower growth? Lower ROI on your sales/marketing investments?

Do you have a solution to these challenges? Is there one? What do you do today -- what is your process to get in? Research -- letter -- call? Who do you target -- what is the title of that person?

Think about your answers to these questions before I give you our solution -- the Executive Access Boot Camp.

... stay tuned for Part 7

Next Mafia Offer Boot Camp in the US is January 30, 31, February 1, 2008 in Denver. Sign up today, registration is limited to 5 companies. $10,000 per company.

Next Executive Access Boot Camp is February 28, 29, March 1, 2008 in Denver. $1,875 per person for all 3 days.

Here's to Maximizing YOUR Profits!
Dr Lisa Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

How to Sell Your Mafia Offer - Part 5

You wrap up a Solution for Sales Mafia Offer presentation the same way you do any presentation. You agree on the next steps and get a specific commitment to the first next step.

So far we have focused our discussion on the more formal PowerPoint presentation. However, there are some offers that lend themselves to a simpler One Pager/Sell Sheet. And in both cases having the shorter version is useful for websites and other collateral.

Check out this website: http://www.drewco.com/. Drewco is a client having gone through a private Mafia Offer Boot Camp in November 2006 and proudly displays their offer on their website. And, if you know anyone who has to have custom workholding devices when promised, please also send them to Drewco's site!

... stay tuned for Part 6

Next Mafia Offer Boot Camp in the US is January 30, 31, February 1, 2008 in Denver. Sign up today, registration is limited to 5 companies.

Here's to Maximizing YOUR Profits!
Dr Lisa Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

How to Sell Your Mafia Offer - Part 4

Now that we have discussed how to open the presentation by "agreeing on the problem", we will cover the next steps -- "agreeing on the direction of the solution".

Continuing with what the PowerPoint Solutions For Sale presentation ...

Usually I transition by saying something like "so if we have accurately captured the problem, we then need to determine criteria for a good solution". We then review the slide with this criteria and get the prospects feedback. We also note that this criteria should be used to evaluate any potential solution, even one from a competitor.

Once we have agreement on the criteria for a good solution we review our solution -- our mafia offer. We usually give an overview of our offer and then go into each component of it in more detail. In this way they get a preview of whats to come and then can concentrate on what is being presented.

After we have reviewed our offer, we return to the criteria for a good solution and ask if our offer has met those criteria. This is agreeing that the "solution solves the problem".

... stay tuned for Part 5.

Here's to Maximizing YOUR Profits!
Dr Lisa Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

How to Sell Your Mafia Offer - Part 3

In Part 2 we discussed how we start the Theory of Constraints Mafia Offer Solutions for Sales presentation by agreeing on the problem. I can't stress enough how important it is to really nail this first part of the presentation.

In no more than 4 slides you should be able to describe how YOUR industry (you and your competitors) are having a negative impact on your customer's bottom-line. If you can do this instead of the typical "Background of Our Company" and "Background of Our Products" they will be eager to hear what yo have to say next instead of being half asleep.

During this part of the presentation I like to generate conversation if there is an opportunity. This is nice because often there are people in the room (we will discuss who should be in the room later) who are not fully aware of these situations or the order of magnitude of them. For example (continuing for the Part 2 example) I may ask if in fact they have the experience of having to hold higher inventories due to a supplier's policy and if despite the fact that they have too much of some inventory do they stock out or almost stock out of others. I'm hoping to hear a story about a time when they ended up having to dump a bunch of inventory and also one about what happened when the stocked out.

Once we have our customer's head shaking in agreement and they have shared a couple stories, they are actually eager to hear what you have to say next. You are the first vendor that has so eloquently described the dynamic between industry practices and you verbalized it better than even they have or could.

The next thing we cover is "Agree on the direction of the solution".

... stay tuned for Part 3.

Here's to Maximizing YOUR Profits!
Dr Lisa Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

PS There are only a couple Mafia Offer Boot Camps remaining this year. Act fast or January 2008 will be your next opportunity!

How to Sell Your Mafia Offer - Part 2

In Part 1 we discussed some background on "framing" and the importance of how you present an offer. So now we are going to apply that to presenting a Theory of Constraints (TOC) Mafia Offer.

During a Mafia Offer Boot Camp we create either a PowerPoint presentation (called a Solutions for Sales presentation) with your offer and/or what we call a 1 Pager. In both cases we follow the same framing.

1. Agree on the problem.
2. Agree on the direction of the solution.
3. Agree that our solution solves the problem.

The above is part of the Theory of Constraints buy-in process. Notice the resemblance to what was presented in Part 1 regarding Ludwig von Mises' three requirements for an individual to change:

1. The individual must be dissatisfied with the current state of affairs.
2. They must see a better state.
3. They must believe that they can reach that better state.

Let's look at each step in some detail.

1. Agreeing on the Problem.

In the PowerPoint presentation we start with "Analysis of the Supplier's Practices". In this part of the presentation we show how suppliers in our industry (us and our competitors) have a negative impact on our customer's business. These negative effects are due to our practices. Typically these practices are common across our industry and include minimum order requirements, scheduling practices, lead-times, and so on. In this way we are starting with how OUR practices are the cause for at least some of their problems.

Here's an example:
Supplier Practice: Minimum Order Quantities and Volume Discounts
Customer's Mode of Behavior: Batch orders (delay ordering) to accumulate needs and order larger quantities than immediate needs require to get the discount.
Implications on Customer's Business: High inventory with all the cost and risk that goes with it.

Here's another:
Supplier Practice: Charge based on time or by project.
Customer's Mode of Behavior: Slow decision process (check references, etc.) to be sure that promised benefits will be actualized.
Implications on Customer's Business: Promised benefits are not always realized or if they are, they were delayed.

When you do the typical sales call -- show up and throw up spouting all the features and benefits of your product or service, the customer is automatically resisting and looking for reasons not to buy. By starting with how WE negatively impact them, customers are more open to hear what we have to say next.

I typically like to generate discussion around these problems because often times there are people in the room that were not aware of the situation or the magnitude of the problem.

In the 1 Pager we start similarly but we have an opening sentence or two to explain the problem(s). We would start with something like:

Widget suppliers typically require their customers to order minimum quantities and give further incentives to place even bigger orders because that's what's best for them. Have you followed the rules? Have a small mountain of inventory? But still stock out? Is doing what's best for us, not as good for you?

... stay tuned for Part 3.

Here's to Maximizing YOUR Profits!
Dr Lisa Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

How to sell your Mafia Offer - Part 1

Part 1: Some background

Which magazine do you think men are more likely to buy:

a men’s health magazine with the cover, “Lose Your Gut Fast” or
a similar magazine with the cover, “Get Six Pack Abs”?

One study showed that over 80% of men chose the first cover – “Lose Your Gut Fast.” Why?
People are more interested in avoiding (or reducing) pain than they are in increasing pleasure.

The Austrian economist, Ludwig von Mises, once said that three requirements must be present for an individual to change:

• The individual must be dissatisfied with the current state of affairs.
  
• They must see a better state.
  
• They must believe that they can reach that better state.

That last point is critical as it relates to the “gut” issue. When someone is 20 pounds overweight, as many Americans are, six pack abs may be desirable but seem inconceivable. I sometimes joke that I would be happy with a “two-pack.” Only when your gut is gone will the idea of six pack abs seem like a possibility.

{The above is part of an article from Stephen Shapiro’s August 7, 2007 newsletter titled "How to Change Your Results by Changing Your Language" and is a nice summary of the data in this field of study -- Framing.)

In Part 2, we will discuss how this has influenced how we present or frame our mafia offer using the Solution for Sales technique.

Here's to Maximizing YOUR Profits!

Dr Lisa Lang

Theory of Constraints next topic?

I would like your feedback on which topic you would like me to address next, here are the options I’m considering:

1. Theory of Constraints on Incentive Plans
2. Most Common Issues when Implementing DBR (Drum-Buffer-Rope)
3. Theory of Constraints on Sales Commissions

As a thank you for replying you can purchase Achieving a Viable Vision for 50% off. Just send me an email and let me know your vote and if you want to purchase the 3 hour audio plus workbook (recorded from a live workshop) for only $99 with free shipping worldwide.

Feel free to ask any questions or suggest alternative topics.

Here's to Maximizing YOUR Profits!

Dr Lisa Lang

What Makes a Guarantee Extraordinary?

"Create a market offer so good, that your customers can’t refuse it and your competition can't or won't offer the same – that’s a “mafia offer”!”

"A Mafia Offer is saying what you are going to do and doing what you said, when you said you would do it and backing it up with a penalty."

Dr Lisa Lang

This article appeared in the March 2007 issue of Chief Executive. It describes the benefits of providing an extraordinary guarantee which is one aspect of a good mafia offer (unrefusable offer, irresistible offer). An extraordinary guarantee is necessary for a good mafia offer, but not sufficient.

In Theory of Constraints we want to guarantee (usually with a penalty) something that you competitor can't or won't match. The guarantee or penalty should be big enough so that your customers know you are serious and so that your competitors won't match it.

To download this article, click here.

********************** start article *******************************************
What Makes a Guarantee Extraordinary?

Unlike typical, mundane guarantees that protect companies more than their customers, an extraordinary guarantee is a powerful promise, backed by a Draconian payout that forces a company to keep it— or else! Such a guarantee has three vital components: the promise, the payout and the payout process.

The Promise:

An extraordinary guarantee promise is a no-holds-barred statement of the benefits a company commits to providing its customers. Notably absent is the fine print that lards typical guarantees down with restrictions customers immediately see as self-protecting “weasel words.”

Take Hampton Inn, which in 1990 was one of the first companies to implement an extraordinary guarantee. Every guest is greeted at check-in by signs stating: To make sure guests get the message, front-desk people are trained to ask, “Are you familiar with our 100 percent guarantee?” Any hesitation produces an explanation that leaves no doubt that Hampton is serious about living up to its promise.

The Payout:

If customers don’t get what they’re promised, an extraordinary guarantee includes a payout that leaves them thinking, “Wow!”

This idea is counterintuitive and scary at first. The knee-jerk reaction of nearly all CEOs is, “That would cost us a fortune!” reflecting a lack of confidence in their company’s ability to consistently provide customers with the benefits they promise. That is exactly the point.
The seemingly breathtaking risk an extraordinary guarantee embodies jolts an organization. “Are you serious? Do you know what would have to change before we could do something like that?”

But when, like Tom Jones, you respond, “Not only are we serious, but I challenge everyone in our organization to think through what changes we would need—and how to make them,” the result is the rapid improvement necessary to offer an extraordinary guarantee with confidence that invocations will be rare. Like in JIT, the painful consequences of not making necessary changes ensures that they are made.

A guarantee payout that would inflict significant pain on your company will also stun your competitors.

How would you feel if you suddenly learned that a major competitor was targeting your most coveted customers with an extraordinary guarantee? “They’re doing what? Are they crazy?” After much gnashing of your executives’ teeth, the inevitable conclusion would be: “Maybe they’re crazy—but we’ve got to respond!”

Suppose, though, that your company did a textbook job of guarantee design and implementation, forcing your shocked competitors to respond. The typical competitive response would be a guarantee that is similar—but only on the surface. To believe that a company could offer an extraordinary guarantee with no planning or preparation is ludicrous.

First, employees, uninformed, untrained and having done nothing to become guarantee-ready, will shake their heads in disbelief: “They’ve decided to do what?” They will correctly conclude that management has made one of the great bonehead moves of all time. What they don’t know, of course, is that sharp minds have tweaked the guarantee to minimize the possibility of any customer invoking it, and that those who try will find themselves in a meat grinder involving proof, investigation, multiple levels of approval, lack of response to questions—the list goes on.
Nearly all customers, however, will be quick to sniff out the guarantee’s holes, embarrassing any salespeople naïve enough to pitch it. The result will be exactly the opposite of the differentiation and loyalty a true extraordinary guarantee creates. As the reality of its folly sinks in, your hapless competitor will hope its guarantee fades into obscurity before it does too much damage.
Too late. Its aborted effort is your gain, strengthening your extraordinary guarantee’s credibility and giving weight to the idea that your firm not only claims to be, but actually is, the best. That’s competitive strength. CEOs should never forget that a strong payout is the linchpin of an extraordinary guarantee’s power.

The Payout Process:

So you offer a guarantee with a strong promise and a meaningful payout. Great—but not if customers find the payout process to be as enjoyable as passing kidney stones.
First, an extraordinary payout process needs to be proactive and empathetic.

At Hampton Inn, nothing impresses guests more than seeing their bills ripped in half when they mention a problem during checkout. Second, the payout process must communicate your intent to find and rectify the causes of customer problems—or they’ll assume that the problems will reoccur. Finally, you must reach out to customers when you have dealt with the causes of their problems. Thank them for providing valuable quality-improvement information, let them know what action you’ve taken, and give them a token of your appreciation.

Amazingly, this last step—reaching out to customers—rarely happens. When was the last time you received this kind of communication from a company? If you did, how would you feel? Now the killer: What would happen if your customers felt this way about your company? An extraordinary guarantee creates the opportunity to find out.

Ironically, whenever a company’s executives explore the extraordinary guarantee idea, someone makes the point, “If one of our good customers has a serious problem, we always end up doing what it takes to satisfy them anyway. Why do we put them through such torture?” Inevitably, a chorus of nods follows.

What are the chances of the same situation playing out in your company? Pretty high, I’ll wager. Over the years, protective layers build up that do nothing but waste resources and corrode customer loyalty. Simply exploring an extraordinary guarantee will bring this insidious problem to the surface and create an opportunity to slice through the web of counterproductive policies and procedures that rarely get any attention.

The Financial Case

Tom Raffio is the CEO of Northeast Delta Dental, which provides dental insurance to employers in Maine, New Hampshire and Vermont. Following is an excerpt from a letter he wrote to me:
“Much of our success is directly due to the quality culture created by our Extraordinary Guarantee. It has been responsible for the overwhelming majority of our company’s growth in subscriber base, customer retention, reserves and corporate reputation. Our ‘smooth conversion guarantee’ has been particularly instrumental in landing new corporate customers.

“The guarantee has been the catalyst for our process improvement efforts, ‘closing the holes in our hose’—an analogy I first heard from you [that we still use].”

The company credits its extraordinary guarantee for its ability to win the Granite State [Vermont] Best Place to Work Award four out of the first five years it was offered and, two years after entering national competition, be named the Best Small Company to Work for in America.

The improvements the extraordinary guarantee spawned have also enabled Northeast Delta Dental to charge prices 20 percent higher than those of the competitors, while simultaneously increasing its market share from less than 25 percent in 1995 to over 80 percent in 2006. Now that’s a financial case!

Christopher W. Hart, Ph.D., is an adjunct professor at Babson College and a former professor at Harvard Business School. He also is president of Spire Group (http://www.spiregroup.biz/), a management consulting and executive- education firm. His email address is chart@spiregroup.biz.

********************** end article *******************************************

Book Review: Blue Ocean Strategy

Blue Ocean Strategy: How to Create Uncontested Market Space and Make the
Competition Irrelevant by W. Chan Kim and Renee Mauborgne.

This review will focus on pointing out those things that are consistent with Theory of Constraints (TOC) and my opinions from those things that are not.

The authors have done a nice job of explaining the problems with current strategy and market development techniques. Specifically, I agree that:

• "... with supply exceeding demand in more industries, competing for a share of contracting markets while necessary, will not be sufficient to sustain high performance." pg 5
• "The result has been accelerated commoditization of products and services, increasing prices wars, and shrinking profit margins." pg 8
• "In overcrowded industries, differentiating brands becomes harder in both economic upturns and downturns." pg 8
• "The trend toward globalization has compounds the situation." pg 8

No question. There is a problem. We can't continue to do things in the same way and expect different results. However, I believe that a couple key assumptions have lead the authors astray.

Here is what I don't agree with:

• "To seize new profit and growth opportunities, they need to create blue oceans." pg 5

Blue oceans are new products in new markets/industries and I believe that in many cases this is an invalid assumption -- that you MUST create new products and/or new markets/industries to substantially grow profits. I believe that this is invalid because we have experience in creating irresistible market offers that we call Mafia Offers. These Mafia Offers are typically for existing products in existing markets. The reason we focus our Mafia Offers develop on existing products in existing markets can be traced back to the 5 Focusing Steps that were discussed in The Goal by Eliyahu M Goldratt:

1. IDENTIFY the system's constraint.
2. Decide how to EXPLOIT the system's constraint.
3. SUBORDINATE everything else to the above decision.
4. ELEVATE the system's constraint.
5. If in the previous step the constraint has been broken, go back to Step 1.

If your system's constraint is the market, then new products or new markets/industries is an ELEVATION step. I believe that before we elevate we should first try to get more (EXPLOIT and SUBORDINATE) out of what we already have.

The authors then address the risk associated with new products in new markets/industries:

• A systematic process will minimize risk to expanding into new products and/or new markets/industries. I agree with this, but then they go on to imply that it would be no more than the risk of strategies around existing products/markets/industries.

I think the business owner who was investing in the new development would disagree.

In contrast, a good Theory of Constraints Mafia Offer will achieve all the positives of a blue ocean strategy without the risk. Because mafia offers are developed on existing products/markets/industries and with little or no investment, it is an EXPLOIT and SUBORDINATION step.

Okay, now back to more about what I liked:

• If and when you need to develop new products/markets/industries then I think the process outlined by the authors is very good.

Almost everyone at some point WILL need to develop new products/markets/industries and I liked this approach. I do think it would be difficult to implement the approach just based on what's in the book. But the framework is there.

Here's to maximizing YOUR profits!

"Dr Lisa" Lang

(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Need an example of a Mafia Offer? http://www.podcasternews.com/programs/87/better-process-podcast/3574/?A=1

Pricing using Theory of Constraints – Q&A

I have not yet finished Blue Ocean Strategy. I will explain why when I post my review.

I have, however, received a pricing question and have written an answer. Enjoy.

Q: What about companies that have a market constraint and use S-DBR?

A: For companies that have a market constraint, I still recommend that they strategically place an internal limiting resource (control point) and use this strategic constraint to determine pricing and product mix.

We find that there is huge variation (+/- 50%) in pricing amongst and between competitors. So determining what is competitive is even a challenge. We use catalogs, industry studies, etc to help with this determination when those are available. Most of the time, we don’t have this information, so we use the technique we were all taught (TVCs + allocated OE + reasonable margin = price). We then ask our prospects/customers by how much did we miss the order or how far off was our closest competitor. Purchasers don’t typically tell us what the other prices were, but they will tell how by what % we missed it or got it.

How/when you modify pricing (in my opinion) depends on the type of offer you have. If you have an offer where you get premium pricing (like the Rapid Response mafia offer) you need to ensure that your standard price (at standard lead-time) is competitive because no one will pay a multiple of a price they perceive to be too high. We have had some situations with this offer where the standard price was not attractive to us (low T/CU) but we needed to offer this product to get the higher T/CU products. In that case we raise the price as much as we can but to still be considered competitive and then we also increase the standard lead-time. So, if we don’t like the price, but it is competitive, we increase the lead-time.

If we are dealing with a VMI type mafia offer than we typically start by matching the current pricing (assuming it is competitive a close to our target T/CU) then getting an increase after proof of concept. We have been successful at getting 2 to 12% increase.

When we consider increasing prices we take into account: T/CU of the product, total $T of the product, weighted average T/CU for the customers buying this product, and total $T for the customers buying this product. If we lose the sales of the product or sales of an entire client we need to understand by how much our T will go down.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

P.S The next open to the public Maximizing Profitability event is Aug 28 in Denver, Colorado. This is a no charge half day event. To register go to http://www.viable-vision.com/

P.S.S The next mafia offer boot camp is August 29, 30, 31 in Denver or schedule a private one at your place, on your time frame! http://www.mafiaoffers.com/ We’re coming to New Zealand and Australia for boot camps in December!

P.S.S.S. Check out our new Theory of Constraints Pricing Project! http://www.scienceofbusiness.com/Default.aspx?tabid=144

Mafia Offer Podcast #1: http://www.podcasternews.com/programs/87/better-process-podcast/3574/?A=1

Purchase Dr Lisa’s book, Achieving a Viable Vision: http://www.scienceofbusiness.com/Default.aspx?tabid=133

Blue Ocean Strategy Review on its way ...

I'm currently reading Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant by W. Chan Kim and Renee Mauborgne.

After several people coming up to me after speeches and telling me that my mafia offer idea sounds a lot like the blue ocean strategy, I have decided that I better determine for myself if that is true.

So far, let's just say it is NOT exactly true. But, I will do a full review once I finish. If any of you have any comments on the topic, please drop me a line.

I'll be back after I complete my review.
Here's to maximizing YOUR profits!
"Dr Lisa" Lang

P.S. Next GROUP Mafia Offer Boot Camp is Aug 29, 30, 31 in Denver. More information at http://www.mafiaoffers.com/

All rights reserved. ©2007 Dr Lisa, Inc.

Mafia Offer Boot Camp Schedule

We just completed another successful Mafia Offer Boot Camp. This was a group boot camp with 4 companies in attendance. We developed 4 very nice mafia offers. The group dynamic is always very interesting because other companies provide feedback on your offer.

We just set the schedule for the rest of the 2007 GROUP boot camps:

• August 29, 30, 31 - Denver, CO
• September 26, 27, 28 - Denver, CO
• October 24, 25, 26 - Denver, CO
• TBD Nov/Dec - Sydney, Australia
• TBD Nov/Dec - Auckland, New Zealand

We also did a private boot camp at the end of May and I received this quote:

"We participated in a Mafia Offer Boot Camp in May 2007. It was a great 3 days! There's a lot of passion that "hey we can do this" and the offer we developed is so much more powerful than where we started! We are looking forward to the follow up calls and to getting started!"
Bob M, General Manager of a small division of a fortune 100 company

Here's to Maximizing YOUR Profits!
"Dr Lisa" Lang

P.S. I'm on vacation next week on a week long bicycle ride through Colorado. I'll be back at the first of July.

Pricing Using Theory of Constraints Part 6 of 6

This is the final installment on Theory of Constraints pricing. At least for now. Goldratt's Theory of Constraints, The Goal, and Throughput Accounting don't address pricing specifially. So, I tried to summarize what we do with our clients. This pricing exercise has resulted in 10 to 20% increase in profits for our clients, so I would expect the same for you. So let's summarize what we covered about pricing.

• Part 1: We discussed the importance of and how to calculate the Throughput per Constraint Unit (T/CU) for each of your current products or services.
• Part 2: We discussed how to calculate a minimum T/CU which is like the minimum price you need to charge to cover your operating expenses and make a profit.
• Part 3: We then compared the T/CU we get for each product/service to the minimum T/CU we calculated.
• Part 4: Next we discussed how to handle products/services that are priced below the calculated minimum T/CU.
• Part 5: And finally we discussed how to handle products/services that are priced above or well above the calculated minimum T/CU.

With this additional information, I hope you can determine a price that 1) will help you to achieve your financial goals; 2) meet or exceed the value perceived by the market place (will customers buy at that price?); and 3) establish the position, brand and image you desire in your supply chain.

Here's to maximizing YOUR profits and setting your prices!

"Dr Lisa" Lang

P.S. Check out our new Theory of Constraints Pricing Project! http://www.scienceofbusiness.com/Default.aspx?tabid=144

(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Mafia Offer Boot Camp Season

I did not write last week. We were doing a boot camp in Kansas City plus a speech for a TEC/Vistage retreat in Michigan. It's Mafia Offer Boot Camp Season. This is a good time of year to do a Mafia Offer Boot Camp because budgeting and preparation for next year are right around the corner. What better way to prepare?

• To have a mafia offer to strategically drive your organization!
• To answer the question why change!
• To sell the improvements you made this year! (If you uncover capacity or increase efficiencies, but don't sell them -- what bottom-line impact have you had?)
• To have a specific plan on how to substancially increase sales AND profits!

We have a group boot camp coming up June 13, 14, 15 in Denver. If you need to decide what next year will bring and the plan to do it, you should consider attending. Drop me a line if your interested in the details and if your company is a good fit. See also www.mafiaoffers.com

And, if you're ready for a break from HUMIDITY then you are also ready for a visit to Denver, Colorado! Did I mention we were in the midwest this week?

Pricing using Theory of Constraints Part 5

For the products that are well above the T/CU you need to look into the following things:
- what is your close rate on these items, is it low?
- have your customers/prospects told you that you were over priced?
- do you want more of this type of business?

The products that are slightly above the T/CU you calculated are probably fine. And some of them that are well above the T/CU are probably OK too. But the ones that you would like to sell more of, but are not, due to too high pricing, these are the ones you should consider lower the price on.

...to be continued...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints Part 4

Let's look at the products that are currently priced below the mininum T/CU that you calculated. You can have some products priced below your min T/CU because the weighted average just needs to be at the minimum. To determine if this is one that should be below the minimum or raised you need to take into account the following:
- where is the competition priced?
- does selling this product, help you to land higher T/CU products with the same customer?
- typically you have more than one of your constraint -- like have multiple printing presses. Does this particular product run on one of your more loaded ones or does it run on a less loaded one?

...to be continued...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints Part 3

Compare the minimum T/CU to the T/CU for each product. You will find current prices that are too low and too high relative to the min T/CU.

Now look at your quotes and calculate the T/CU for all your quotes. What is the T/CU for the ones your winning versus the ones your losing?

...to be continued...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints Part 2

Now that we have our current T/CU for each product/service we calculate the minimum T/CU we need to cover all of our Operating Expenses plus make the profit we want. Here's how we do that:

Min T/CU = (annual OE + annual profit) divided by annual available constraint units

Operating Expenses (OE) are all the costs that don't change when you sell just ONE more of your product/service. They are all the costs not captured in the TVCs (Truly Variable Costs) and typically include rents, utilities, selling/marketing, general admin, all labor including direct, maintenance, and warehousing expenses.

To start, you can use your current annual profit, then increase it to see where you need to price to meet your profit goals.

Constraints Units (CU) are the annual number of hours or minutes you have available. So you you work one shift then use the time from one shift times about 70% which takes breaks and other misc downtime.

Now you have 1) your current T/CU for each product (see Part 1) and 2) the minimum T/Cu you need for each product.

...to be continued...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Pricing using Theory of Constraints PART 1

Deciding on pricing for your products or services tends to consume a lot of time and can even be stressful. Typically we are looking for a price that 1) will help us to achieve our financial goals; 2) meet or exceed the value perceived by the market place (will customers buy at that price?); and 3) establish the position, brand and image you desire in your supply chain.

The Theory of Constraints approach to pricing adds a slightly different perspective. When we first start working with a client we calculate the Throughput per Constraint Unit (T/CU) for each product/service. Here's how you do that.

1) List each product or category of products. If you have custom products, then use product categories. If you sell the same products multiple times, then list the individual products.
2) Calculate the Throughput(T) for each where T is the selling price minus the truly variable costs (TVCs). Typical TVCs are raw materials, sales commission, outside services, and freight.
3) Estimate how much of the constraint each product uses, how many constraint units. This is typically a time measure.
4) Divide #2 by #3 and you have T/CU for each product e.g. Throughput $ per minute.

Do this and now you have some information about your current pricing.

To be continued ...

Here's to Maximizing YOUR Profits!
"Dr Lisa" Lang

P.S. Check out our new Theory of Constraints Pricing Project! http://www.scienceofbusiness.com/Default.aspx?tabid=144

Free Theory of Constraints Consulting

We recently updated OUR mafia offer to include free consulting for up to 3 months after you participate in a Mafia Offer Boot Camp. Recently someone asked me, why? I thought that the reasons would be obvious, but that's why assumptions can be dangerous.

We offer free consulting for 2 main reasons:

1) We want you to get maximum value from your boot camp. During the 3 days we calculate the bottom-line impact we project with the newly developed offer. But, if you have a great boot camp and develop a true mafia offer, if you don't implement it --> still no bottom-line results. So we schedule weekly calls to make sure that you and your team focus. We hold you accountable, answer questions, help overcome obstacles, and provide any additional examples you might need. For example, most companies create a Frequently Asked Questions document after the event and we have many examples we can share.

2) Many of the Mafia Offer Boot Camp attendees need and/or want help in implementing their offer after the event. (The exception is typically service companies that require few or simple operational changes.) As you probably already know, we offer a 100% results based option where you only pay us if your PROFITS increase. If your profits don't increase we don't get paid. This means we need to be sure that you will take our advice and implement. We can't do it for you, so we need to be sure that YOU will drive your implementation. If you are getting results during the free consulting stage, then we give you our 100% results based consulting option. If however, during each call we just talk about why you haven't accomplished anything, then we may not offer you the 100% results based option.

So, yes we are nice people, but we also want you to be raving about the boot camp because you got HUGE bottom-line results and we want to get to know you better before we go forward with a results based consulting contract.

Here's you maximizing YOUR profits!
"Dr Lisa" Lang

Excess Capacity for a Viable Vision

Question: How much excess capacity do you need to have to make a Viable Vision viable?

Answer: It depends. Squeezing more capacity out of your existing operation without investment is relatively easy (you read about it in The Goal, Its Not Luck, and Critical Chain). The hard part is selling it. You need an unrefusable market (a “mafia offer”) offer in order to sell all your capacity (you read about this in Its Not Luck). The Viable Vision is the specific strategy and tactics necessary for you to uncover your capacity and the market offer that will bring your company to have a profit level equal to your current sales level.

What percent of sales are your truly variable costs (TVCs)? Remember that we define TVCs as those costs that change when an additional product or service is sold. TVCs include raw material, sales commission, freight, subcontractors, and the like.

The higher your TVC or lower your throughput (T = sales – TVCs), the more excess capacity (or price premium) you will need to make it possible to turn your current sales level into your profit level in 4 years.

Here’s an example: If you currently have $10 million in sales and TVCs at 30% you will need $23 million in sales. This assumes that you could add these sales with your current labor and/or operation expense (OE). And, in many cases this is quite possible.

If you will need to add labor or other OE, then for each million in those costs that you add you will need to sell another $1.43 M (amount OE added divided by throughput). This is typically not a big deal (we have a client right now with about 65% TVCs), it is just something we have to take into consideration.

So, the more you can sell with your existing resources and investments, the quicker you can turn your current sales level into your profit level. And, your specific mafia offer will also play a big role in the amount of excess capacity you will need. If you can get a price premium, then you will need less capacity and less sales.
The smallest company on a Viable Vision right now started at $1.2 M in sales and the largest started at $4 B (billion!).

But this is way more information than you need because we will collect the data for your company, develop your Viable Vision, and spend 2 hours with you discussing your company and your Viable Vision for FREE, no strings. The only catch is that the CEO, President, or business owner must have attended one of my Maximizing Profitability events to be eligible for the free offer.

And if you decide that you would like guidance from us in achieving your Viable Vision, then 100% to 90% of our fees are based on YOUR results. If you don't get the results, you don't pay! And yes there is a 100% results based option!

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

99/1 Rule vs 80/20 Rule

Question: You mention in your speech that TOC (Goldratt's Theory of Constraints) is about the 99/1 Rule, not the 80/20 Rule. Can you explain that?

Answer: Let’s start by talking about the 80/20 Rule. The 80/20 Rule, also called the Pareto Principle was made universal by Juran and refers to the “vital few and trivial many”. According to Juran:

“It is a shorthand name for the phenomenon that in any population which contributes to a common effect, a relative few of the contributors account for the bulk of the effect.”

This principal is universal. It applies to your customer base – 20% of your customers account for 80% of your revenue. Your customers are independent or unrelated contributors to your revenue.

When we are talking about maximizing profitability, and the contributors of profitability (various elements in your system) are related, then the 80/20 Rule still applies, but it is too broad. Because the contributors of profitability are related, the largest contributor will have a much greater impact than all the remaining contributors. This is due to the statistical fact that dependent contributors add up as the sum of their squares. By squaring each contributor, the largest one ends up being closer to 99% of the sum of the squares. This largest contributor is your constraint – it’s the thing that limits your profitability most.

Most companies have one or few constraints. The number depends on the number of independent processes. If all your processes are in some way dependent on each other, then you will have one and only one constraint. If you have 2 completely independent processes for 2 different products or services, then you will have 2 constraints in your system. Since your system is limited by the amount of work that the constraint can process, your constraint is the BIGGEST contributor to your profitability. Hence, focusing on your constraint(s) is where you will have the greatest leverage on your profitability – the 99/1 Rule.

In summary, when you are trying to identify where to focus your efforts (quality or otherwise) and the contributors are related or dependent, then determine your constraint (your 99/1) first. Then, use the 80/20 Rule to determine the main contributors of an effect or problem within the constraint or constraint process.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

Should I factor my receivables?

Question: Should I factor (sell) my receivables? I could use the cash, but the cost seems too high.

Answer: This question is hard to answer without more information, so let’s look at an example:

Let’s say it costs you $40 to make a product you typically sell for $100. If you could get $100 dollars in 60 days from your customer or $80 dollars in 10 days from selling the invoice, which would you prefer?

To compare the 2 options, let’s calculate the amount of Throughput that each option would generate in 60 days. Remember, Throughput = Sales Price – Truly Variable Costs.

Option 1: We wait to collect the accounts receivable in 60 days. Therefore in 60 days we generate $100-$40 = $60 in Throughput.

Option 2: We sell the invoice and receive $80 in 10 days. Therefore we have generated $80-$40= $40 in 10 days. But we still have 50 days to go, so we invest our $40 in more raw materials and sell another product. For that product we also sell the invoice and generate another $40 in Throughput. We now have 40 days to go, so we repeat the process 4 more times. In 60 days we generate $240 in Throughput.

So the answer is “it depends”. If you have a use for the money that will generate additional Throughput, then you’re on your way to maximizing your cash flow and your profitability! If you have plenty of cash, then it doesn’t really make sense.

Another way to accomplish the same thing is to offer very deep discounts if your customers pay very quickly. However, if you decide later that you don’t want to offer this option anymore, then you have to explain that to your customers.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
P.S. Happy birthday to my sister Tammy!

Maximizing Profitability Workshop May 11, 2007 in Denver

If you have never attended one of my Maximizing Profitability events, here's your chance. The next one is May 11, 2007 at the Wellshire Inn in Denver.

Event Description

In this highly interactive presentation, “Dr Lisa” Lang engages the group in discussion and hands-on participation to discover how to LEVERAGE their existing resources using Goldratt's Theory of Constraints to maximize profitability. An approach to developing a “Mafia Offer” and to achieving rapid sustainable growth (a Viable Vision) is discussed, along with:

· How to make management decisions that are aligned with profitability goals
· How to increase profitability by increasing capacity with no corresponding increase in expenses or capital investment
· How to create a “Mafia Offer” that allows this newly created capacity to be sold

Dr Lisa provides a unique, counter-intuitive perspective based on scientific methods, causing participants to challenge their current assumptions and think bigger. Participants will learn to make decisions and strategic plans that are aligned with maximizing profitability.

The value to participants will include:
· Improved understanding of how to leverage their constraint and existing resources to drive profitability
· 4 metrics and 3 decision rules to make day-to-day and mix decisions that maximize profitability
· How to have the biggest and quickest impact with their Lean and Six Sigma efforts
· The guidelines and examples for creating a “Mafia Offer” – an offer that is so good your customers can’t refuse it and your competition can’t or won’t offer the same.

If you are frustrated with your profit level and are tired of playing Whac-A-Mole, then this event is for you! Click here for the fax registration form. It's only $29 and includes lunch.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

Cash Velocity Summary

Continuing our cash velocity discussion started on March 16, 2007

Cash Velocity Summary

There are two cash velocity rules:
● Make sure that the amount and rate of cash flowing in is enough to cover all your business and personal needs
● Be paranoid. Unfortunately, stuff happens. And unless you’re willing to risk losing your passion, studying and maximizing your cash velocity is essential
The goal of this chapter was to educate the reader about cash velocity -- how to maximize it and how to avoid cash becoming your constraint. We discussed the two drivers of velocity: throughput and cash-to-cash cycle time. We found that by using Goldratt's TOC techniques, we can increase throughput and reduce cash-to-cash cycle time. We also discovered that the velocity of throughput can be more important than the amount of throughput, especially when we are limited by cash.
If fear of cash problems is not enough for you to monitor, forecast and plan for you cash velocity needs, then consider this: The real value of your business is NOT based on your accountant’s value of your assets; it is based on the cash earning stream that your business assets are likely to produce. The more predictable and reliable this stream of cash is, the more valuable your business is. So if you ever plan to sell your business and retire with the money, then you need to pay attention to your cash velocity. Your banker will also value your business and assess your risk based on your cash flow.[1] Cash is still king. It’s still the life blood. So get in the drivers seat by understanding and increasing your cash velocity.

[1] Many banks use the Uniform Credit Analysis® Cash-Flow Worksheet developed by Wells Fargo and made popular by the Risk Management Association.

That completes the cash velocity discussion we started on March 16 for now. What would you like to hear about?

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Increasing Throughput -- Other Considerations

Continuing our cash velocity discussion started on March 16, 2007

Increasing Throughput -- Other Considerations

In previous sections we have covered raw materials and how to reduce them. We also need to cover WIP (Work In Process) and finished goods inventory. DBR Scheduling* reduces WIP by releasing raw materials at the rate at which the constraint can consume the raw materials. Demand Pull* can also be used to reduce finished goods inventory. If we make to stock, or use a replenishment system to supply our customers, then we can minimize the amount of finished goods we carry while at the same time increasing the probability that we will have on hand what is needed. When DBR Scheduling and Demand Pull are implemented, we see a mean reduction in all inventories of about 50%. All of this, of course, helps us to further reduce cash-to-cash cycle time.

* DBR Scheduling and Demand Pull as defined in Goldratt's Theory of Constraints

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Increase Throughput -- Increase Sales cont.

Continuing our cash velocity discussion started on March 16, 2007

Increase Sales cont.

Last time we ended our discussion with this question: So how do you increase your throughput without going into cash trouble?

The first step is to examine your product mix. Calculate the T/CU for each product. With this information you can devise a strategy to sell more products with higher T/CU and drop those with a lower T/CU. This will allow you to maximize your throughput without investing additional capital or having to tie up more cash in the form of raw material.

Then once again, we must decrease our cash-to-cash cycle time which we have already covered.

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Increase Throughput -- Increase Sales

Continuing our cash velocity discussion started on March 16, 2007

Increase Sales

Increasing sales is a sure fire way to increase your throughput and is theoretically limitless. My first question is: Are you selling all that you can now? If you are a “make to stock” company, do you ever have the case where you don’t have the product your customer is looking for in stock? If so, you could benefit from DBR Scheduling and Demand Pull to ensure that you always have what your customers demand.

But, let’s say that you have already implemented DBR Scheduling and Demand Pull, and you currently can provide what they want on time. To increase sales you must learn and met your customer’s business NEEDS. New customers are earned over time by understanding the business needs that they have, then customizing your products, services, or policies to meet those needs. In TOC we call this creating a mafia offer. Market Segmentation will be a likely result of matching your offerings with your customers or potential customer’s perception of value. All that being said, sometimes business owners already know that they could earn more business from existing customers or know where that can find new customers. What stops them is cash. To grow sales takes cash and to grow sales a lot takes a lot of cash. So how do you increase your throughput without going into cash trouble?

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Increasing Throughput -- Increase Selling Prices

Continuing our cash velocity discussion started on March 16, 2007

Increase Selling Prices

Changing the selling price for a product or group of products is difficult to cover in few words. Presumably you already have pricing policies and strategy that represent some equilibrium point in the market you serve and getting some minimum T/CU across your mix of products/services. If you understand the perceived value by your customers for the products/services you offer, then to increase prices you must stay within this perceived value or increase your customer’s perception of value. A mafia offer[1] is the Theory of Constraints (TOC) method to increase your customer’s perception of value even in industries considered to be commodities.

In addition, Market Segmentation should be considered. Identify segments of markets that have different values for the products and services you offer, then set selling prices for these markets that are consistent with their perception of value and your mafia offer. Segmentation should help you to match selling price with customer’s perception of value and allow you to maximize your selling price while ensuring that you’re meeting your customer's needs.

[1] We will discuss more about mafia offer in #1 below. Also, see http://www.mafiaoffers.com/ for more information on creating a mafia offer.

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Sales Commission -- Effect on Throughput

Continuing our cash velocity discussion started on March 16, 2007
We last left off on Friday April 6, 2007.

Deceasing sales commission is not necessarily where we want to focus either, but make sure that the commission you’re paying is in alignment with where you’re making your money and/or with the products/services with the highest cash velocity. If you have varying T/CU[1] across your products/services, but you are paying sales people a commission on selling price or gross margin, you may not be motivating them to sell the products that provide the highest throughput for the least amount of your most precious resource. In addition, the traditional way of paying sales people does not take into account the cash velocity either. The ideal commission structure would motivate sales people to sell the highest T/CU combined with the best velocity products/services.

[1] Thoughput per Constraint Unit. This is the amount of money you generate on a sale divided by the amount of your limited resources capacity consumed in order to produce the sale. See Throughput Accounting as part of Goldratt's Theory of Constraints.

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Increase Throughput to Increase Cash Velocity

Continuing our cash velocity discussion started on March 16, 2007

Increasing Throughput

Throughput (as defined in Goldratt's Theory of Constraints Throughput Accounting) is sales revenue minus truly variable costs. Therefore we can increase your throughput by either 1) increasing sales, 2) increasing our selling prices, or 3) decreasing our truly variable costs.

Let’s start with the last one, first. To decrease our truly variable costs we can:

• Negotiate a lower price with raw material suppliers
  
• Negotiate a lower price with outside services, freight suppliers, or with any other truly variable cost vendors that we have
  
• Decrease the sales commission we pay to our sales people

There is a limit to how much we can reduce our costs. If our costs go to zero, then we are no longer in business. Therefore, we want these costs to be in line, but this is not where we want our focus.

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

2007 Mafia Offer Boot Camp Schedule

In my last post I mentioned "Mafia Offer Boot Camp". We spend 3 days developing your mafia offer just like Alex Rogo in It's Not Luck. Upcoming public boot camps are currently planned as follows:

• June 13, 14, 15 in Denver, Colorado click here to register now by fax
• August 27, 28, 29 in Denver, Colorado
• December in Sydney, Australia
• December in Auckland, New Zealand

Each event is open to only 5 companies, so plan ahead or schedule a PRIVATE boot camp.

What is a Mafia Offer Boot Camp and what's the cost?

Detailed agenda of a Mafia Offer Boot Camp.

Factoring Receivables Reduces Cash to Cash Cycle Time

Continuing our cash velocity discussion started on March 16, 2007
Yesterday we discussed how offering a discount can reduce cash to cash cycle time and today we will discuss an alternative.

Another approach, which leads to similar results is receivables factoring. Factoring receivables, however, takes about a month to set up in order to provide all the necessary information. They charge based on how long it takes your customers to pay. This is typically in the range of 1 to 5% which is a much better deal than the 20% discount. However they typically pay you 80% of the invoice within 2 days but hold 20% of the funds back until your customer has paid. We usually start with the discount offer then switch to factoring once we can get it set up.

In addition to the above ideas, with DBR Scheduling we can also give preference to customers who pay quickly. Customers who pay quickly are certainly better, as demonstrated above, to our cash-to-cash cycle time.

The shorter lead-times that result from implementing DBR can also allow us to offer shorter lead-times for higher prices depending on our industry. This would be determined during your mafia offer development[1].

... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

[1] We typically do a Mafia Offer Boot Camp over 3 days. For more information see http://www.mafiaoffers.com/

When Offering a Discount Makes Sense

Continuing our cash velocity discussion started on March 16, 2007

Last time (on Friday) we talked about offering a discount to our customers if they paid on delivery.

What kind of discount could you offer to get cash back into your system faster so that you could make more money? Before you answer that question, also consider that 1) you need to be able to sell the additional products so that you can benefit from the faster cycle. If you offer a discount, get the cash back quickly, but don’t have another order, then this strategy is not a good idea for you. 2) If you have other sources for cash, like a line of credit, you may be better off to use that than to use deep discounting. You’ll want to compare the Return on Investment of each. 3) However, if your cash is close to becoming a constraint, and you have no borrowing options, this idea could keep you in business.

A 20% discount for 42 days is an interest rate of 174%. But the cost of money is less important than the availability. Obviously you would not do this if cheaper money was available.

When we have used this type of offer to recover from a cash constraint, we let customers know that it was an offer we were testing to determine customer interest and that it may not be a long-term offering. This will give you the option of discontinuing the offer once you have another source of cash to grow your business.

.... to be continued ...

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

The Goal is Still a Best Seller!

The Goal, orginally published in 1984 is the best selling business book in the world. You can still walk into most books stores and find a copy on the shelf. Right now, it is selling really well in Japan.

The BusinessWeek Best-Seller List -- Paperback Business Books

1 GOOD TO GREAT AND THE SOCIAL SECTORS Jim Collins (Collins -- $11.95) A primer on how noncorporate organizations can excel. Last month: 2, Months on list: 15
2 START LATE, FINISH Rich David Bach (Broadway -- $14.95) Strategies and tactics for baby boomers nearing the age of retirement. Last month: 1, Months on list: 2
3 CRUCIAL CONVERSATIONS Kerry Patterson, Joseph Grenny, Ron McMillan, Al Switzler (McGraw-Hill -- $16.95) How to handle those all-important talks. Last month: 7, Months on list: 13
4 QUANTUM SUCCESS Sandra Anne Taylor (Hay House -- $14.95) The "science of success," as described by a psychologist and consultant. Last month: --, Months on list: 1
5 A GUIDE TO THE PROJECT MANAGEMENT BODY OF KNOWLEDGE Project Management Institute (PMI Publications -- $49.95) Delivering results. Last month: 8, Months on list: 13
6 WHAT COLOR IS YOUR PARACHUTE? 2007 Richard Nelson Bolles (Ten Speed Press -- $17.95) The enduring job-search bible. Last month: 4, Months on list: 7
7 LEADERSHIP AND SELF-DECEPTION The Arbinger Institute (Berrett-Koehler -- $14.95) A leader's motivation is what matters, says this business fable. Last month: --, Months on list: 9
8 J.K. LASSER'S YOUR INCOME TAX 2007 The J.K. Lasser Institute (Wiley -- $17.95) Time to start sorting receipts. Last month: 3, Months on list: 3
9 THINK AND GROW RICH Napoleon Hill (Ballantine -- $7.99) Willpower and a positive attitude are the essential elements of success. Last month: 12, Months on list: 22
10 FLIP Rick Villani, Clay Davis (McGraw-Hill -- $21.95) Finding, remodeling, and selling properties. Last month: --, Months on list: 1
11 THE GOAL Eliyahu M. Goldratt, Jeff Cox (North River Press -- $24.95) A "business novel" on overcoming bottlenecks. Last month: --, Months on list: 5
12 THE ERNST & YOUNG TAX GUIDE 2007 Ernst & Young LLP (CDS Books -- $16.95) Sharpen those pencils and get out the W-2s. Last month: 5, Months on list: 3
13 THE ESSAYS OF WARREN BUFFETT Warren E. Buffett, Lawrence A. Cunningham (Cunningham Group -- $25) A selection of epistles to Berkshire Hathaway shareholders. Last month: 9, Months on list: 4
14 THE INTELLIGENT INVESTOR, REVISED EDITION Benjamin Graham, with Jason Zweig (HarperBusiness -- $19.95) The classic treatise on "value investing." Last month: --, Months on list: 21
15 A WHOLE NEW MIND Daniel H. Pink (Riverhead -- $15) The future belongs to "right-brain thinkers." Last month: --, Months on list: 1

Increasing Cash Velocity Can Increase Throughput

Continuing our cash velocity discussion started on March 16, 2007

Now let’s look at the impact on what we discussed yesterday had on our throughput.

Let’s say we immediately visit a customer whose complete order was shipped and had just been received by that customer. We make, and they accept, our 20% Discount Mafia Offer and we collect $320 in cash. We pay the sales commission of $40 so we have $280 left. With the $280 we can buy 2 sets of raw materials ($100 each) to produce 2 more products and still have $80 in cash.

We then sell those 2 products with our discount offer collecting $640 ($320 x 2). We pay sales commission of $80 but had $80 in cash from the first offer, so we now have $640 in cash. We buy 6 sets of raw materials and have $40 in cash left. We sell all 6 products with our discount offer collecting $320 x 6 = $1,920. We pay $240 in sales commission leaving $1,920 - $240 + $40 = $1,720 in cash. Let’s go one more time, a 4th cycle. We take the $1,720 in cash and buy 17 sets of raw materials, leaving $20. If we sell all 17 products with our discount offer we collect $320 x 17 = $5,440. We pay sales commission of $680 leaving $4,760, plus the $20 left from the previous cycle, we now have $4,780 in cash.

So, in 53 days you can sell 1 product and generate $260 or you can make a “discount” offer which enables you to sell 17+6+2+1 = 26 products and generate $2,520 in throughput in 52 days.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Cash Constrained Company Example

Continuing our cash velocity discussion started on March 16, 2007

Reducing Float for the Cash Constrained Company

Now let’s consider a case where there is a cash constraint.

When cash is your constraint, going out of business is usually not far behind. Most small businesses go out of business because they have run into cash trouble. A cash constraint situation can occur to profitable businesses simply because they must pay vendors before they receive their payments – their cash-to-cash cycle times are too long.

Let’s continue with the company who has a cash-to-cash cycle time of 55 days. Because their cycle time is a positive number it means that they must pay their vendors for raw materials before they get paid by their customers. But now, our company has a cash constraint and they can not buy any raw materials. What can be done?

We need to collect enough cash to buy raw materials so we can work our way out of this jam. Consider the impact if we offer a 20% discount on any order paid in full on receipt of goods (a temporary Mafia Offer) . The product sells for $400 but our truly variable costs for this product are only $140. That includes the 10% sales commission. For customers that take the discount, the cash cycle time would be 13 days with throughput of $180 ($400 less $140), almost a velocity of 14! Any customers that pay full price and take the 42 days to pay, their cash to cash cycle time remains at 55 days with throughput of $260 (4.73 velocity). Therefore, we have almost a 4:1 cash cycle if customers take the discount. What a difference!

... to be continued ....

Here's to maximizing YOUR profits!
"Dr Lisa" Lang
(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

The Role of Payment Terms in Cash Velocity

Continuing our cash velocity discussion started on March 16, 2007

The Role of Payment Terms in Cash Velocity

To reduce the time it takes to collect payment from our customers we offer a 1%/10 option, but none of our customers use this option and many of them pay late which is why we have an average of 42 days. So we remain at 55 days.

Thus far we have gone from receiving a net of $300 every 134 days to receiving that same $300 every 55 days. If we were to pay out a 10% sales commission (on selling price) once the customer pays, the net receipt would be $260 every 55 days (assuming continuous sales). More than double the velocity.

Our cash velocity has gone from 1.94 ($260/134 days) to 4.73 ($260/55 days)!

This increase in cash velocity can help you to grow your business. The difference in velocity is 4.73 – 1.94 = 2.79. This means we are getting our cash back more than two times faster than before. We can use this cash to fund additional raw materials and grow our sales and profits.

However, if you reduce your cash-to-cash cycle time but do not have the opportunity to increase your sales, what have you gained? The only bottom-line impact you would have is the reduction of carrying cost and the interest you would now be earning on the cash you are accumulating.

In addition, if you have a cash reserve, you are now in a position to take the discount your vendors are offering. If terms are 2% discount if paid within 10 days or full payment in 30 days, what return would you earn? A 2% return on 20 days is equivalent to 36.5% return over a year. That is a good return, but taking the discount depends on what else you could do with the extra 20 days of money. If your company is growing, and you can use the cash to grow, then you may be able to produce and sell another product in that time. The answer then, depends on your cash position and your goals.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.

Goldratt's Theory of Constraints Demand Pull

Continuing our cash velocity discussion started on March 16, 2007
Side Bar for Wednesdays March 21 post:

To minimize the amount of materials we have on hand, we should examine our purchasing policies. Many times we purchase in large quantities to save money. If we purchase in large quantities, we can often receive a quantity discount, and we also can spread the transportation cost over more items. This savings in raw materials and logistical costs are a mirage, because we have to store what we don’t use and we are at risk for inventory obsolescence. If instead, we replenish our materials based on the Demand Pull / Replenishment systems, then we can minimize what we have on hand while ensuring that we have what we need. In addition, our cash position is stronger. We will have only spent/invested what was necessary.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

Mafia Offer Podcast

I'm taking a break from our cash velocity discussion today to make you aware of my second podcast. In this podcast Jeff "Ski" Kinsey probes with some interesting questions regarding mafia offers and our Mafia Offer Boot Camp.

The newest podcast is available here: http://tppress.blogspot.com/2007/03/dr-lisa-podcast.html

My first podcast on mafia offers is here: http://www.podcasternews.com/programs/87/better-process-podcast/3574/?A=1 This one has had well over 1000 downloads just since Feb 7, 2007.

Here's to maximizing YOUR profits!
"Dr Lisa" Lang

Here is one of the very interesting questions and the answer:

QUESTION: Confirm for us, please, why a "hands on" boot camp approach is so much more valuable than other techniques.

ANSWER: When most of us are presented with a concept, particularly if it is not one we developed we have this wonderful ability to think of all the reasons why it won’t work. So if someone told you your mafia offer or you read about the process to create one … you would simply do what we all do—come up with all the reasons why it won’t work for you.

During the boot camp YOU and your team build your mafia offer. You know your company, your competitors, and customers best. We combine your knowledge with a solid process to facilitate and guide you to develop the offer that is unrefuseable to your customers but something your competition can’t or won’t do. We usually know we are on track when YOUR team is worried about being able to deliver the offer. This happens because we first develop the offer, assuming we could do anything and setting aside all our current assumptions, reasons why we can’t change and current way of doing things.

We start over, with fresh eyes and a fresh look at your business – and this is something you can’t read about or someone just tell you about.

Goldratt's Theory of Constraints Demand Pull

Reduce Material On-Hand to Reduce Cash-to-Cash Cycle Time

To reduce the number of days we have material on hand, be can implement Goldratt's Theory of Constraints Demand Pull[1] solution. We know from Demand Pull that historically we compensated for not having a good scheduling system and for our customers providing ever moving but always wrong forecasts by holding more raw material than we actually need. And still there would be situations when we had too much of some raw material, but not enough of what we needed. By implementing DBR Scheduling and Demand Pull, there will be an overall reduction in the amount of raw material we need to carry, and a higher probability that we will have what we need, when we need it. We also know that our ability to reduce the amounts of raw materials we carry is directly related to the time it takes us to reliably replenish.

Continuing our example from yesterday:
Our vendors have not implemented DBR Scheduling, so it takes them about 21 days to replenish us. So, for our example, let’s say that the mean time we have raw material on hand goes from 90 days to 30[2] days. Now our cash-to-cash cycle time is down 60 days to 55 days (115 less 90 days plus 30 days).

[1] To learn more about Demand Pull see the interactive program, The Insights by Goldratt
[2] We are allowing 3 days of transportation time and 6 days of buffer in addition to the 21 days to replenish.

(c)Copyright 2007, Dr Lisa, Inc. All rights reserved.