Finding Common Ground Between CFO and COO–Part 10

[Continuation…]

 

Some key factors in creating Irrefusable Offers

What are some of the key elements that should be considered by the CFO and COO when creating “Mafia Offers”?

Well, if the CFO and COO have come to properly understand their market and market segmentation through analytics (simple is better), the next step is to unlock “tribal knowledge” within the organization so the customer’s experience and customer’s desired results are clearly understood for each market segment. If necessary, that may mean identifying a market segment constituted of only one customer.

Make the offer learning, anticipating or filtering

The irrefusable offer must be one that lightens the burden felt by the customer, improves the customer’s experience, and produces better results for the customer. Offers that are learning, anticipating and filtering are such offers.

Take a look at the offer give in Example 1 in Part 8 of this series. This offer lightened the burden on the customer by reducing the customer’s need to store and handle large quantities of inventory month after month. The billing method, in turn, improved the cash flow for the customer, as well.

The offer was, in fact, anticipating the customer’s needs and filtering the volume down to the quantities actually required while still providing the prices to which the customer was accustomed under the previous ordering practices.

This offer, however, could have been made even more learning, anticipating and filtering. Suppose they had offered to simply replace the quantity actually consumed each month, rather than a flat 50,000 units per month. This may have been even more appealing to the customer.

Make the offer customizable

Buyers ranging from individuals buying one-offs via the Internet to professionals buying for big-box merchants today are influenced by customizable offers. Sometimes it is the actual product that is customized (e.g., made to specification, personalized, color or style options). However, even typical commodity offers can be customized.

When the product itself cannot or is not offered as customized, that does prevent the offer itself from being customized. Offers may be customized around several parameters:

• Delivery method – online, next-day, same-day, free-freight, in-person, vendor-managed and so forth
• Delivery quantities – incremental deliveries, truck-load, on-demand quantities
• Payment terms – credit card, 90-days same as cash, consumption-based invoicing

The goal, of course, in any customization in the offer is to improve the customer’s experience and results.

Make the offer upgradable

Without renegotiating the whole deal, an upgradable offer allows the customer to add-on, extend, or improve upon an existing trading agreement. This is especially valuable where the market may be subject to significant changes—as are most markets today. I think most CFOs and COOs would agree that they would much rather keep a customer through an upgradable offer than to risk losing the customer because the customer feels that they must renegotiate “the whole deal” anyway.

Again, looking back to the offer give in Example 1 in Part 8 of this series, you can easily see that this offer was, indeed, upgradable. The offer could be extended to buy more of the same product, or additional products could be purchased under the same plan.

Make the offer online, interactive or one that provides near real-time feedback

Offers that lead to or involve sharing information in real-time or near real-time are also generally more able to be learning, anticipating and filtering. The close contact created by interaction between seller and buyer may also lead to valuable insights that could lead to more customized or upgradable offers.

Some time ago I had opportunity to discuss a new software purchase with the CFO a rapidly growing $350 million enterprise. I asked him what he thought about the software, but when he replied, he did not really talk about “the software,” at all. He said:

“The company has this great approach to support. They offer an online knowledgebase that is searchable and provides a wealth of helpful information. But what’s even better is that they monitor activity on the support site 24-hours a day. If it seems you are not finding the answer to your question after a couple of attempts, a dialog box pops-up and a live support person proactively offers to help you resolve your issue right then and there.”

Clearly, this buyer of “software” was far more impressed with online, interactive, real-time feedback from support than the software itself. This CFO has purchased “software,” but what he got was a better experience and improved results from his purchase.

Accompany the offer with anytime access and response

In a world where the typical customer is empowered by Internet access to so many options, providing an offer that includes anytime access or response is likely to improve the customer’s experience and results. This is proven by the previous example where the CFO mentioned the fact that the support site was proactively monitored “24-hours a day.”

In fact, I personally find that my clients feel much more “connected” with me when I give them my cellular phone number and assure that they are free to call me (literally) 24-hours a day if they need my assistance.

[To be continued…]

Finding Common Ground Between CFO and COO–Part 9

[Continuation]

So, what are the keys to constructing irrefusable offers (Mafia offers)?

Market segmentation

The CFO and COO must come to understand the key components that go into their trading partners’ experience and what their trading partners view as improved results. More importantly, they must begin to see that different trading partners or different market segments have different experiences and seek different improved results.

In order to get a better understanding of how to segment your market, the CFO and COO should employ a combination of market analytics (business intelligence) and tools to unlock “tribal knowledge” from within the organization itself.

As the figure above suggests, different target markets will find value in differing aspects of “the offer.” Some will find the value in a product’s ability to be customized or adapted to their specific application. Others will find greater value in how the product is delivered (speed or online). Still others will find greater value in intangibles such as VMI (vendor-managed inventory) or the ability to receive small, more frequent shipments,while achieving the same price-breaks as larger orders. It is impossible to know until the CFO and COO take time to analyze and understand how and why they sell—or fail to sell—into various markets.

Capabilities

Another factor concerning which the CFO and COO must come to agreement regards the firm’s capabilities. What can be done within the firm’s capabilities to supply an improved customer experience for various segments of the market? In addition, what can be done—still within the firm’s capabilities—to help assure that the customers in various market segments are getting better results than the competition is delivering?

Understand that, until the firm’s various market segments are understood clearly, it is impossible to even formulate the right questions around “capabilities” and how to apply them toward the creation of irrefusable offers.

Creating an operating partnership with your customers

The really great and long-lasting irrefusable offers stand above the rest because they create a durable competitive advantage for both the vendor and the customer. The offer brings your firm and your customer’s firm into an operating “partnership” that produces better—and improving—results for your customers while increasing your own firm’s Throughput and profits. This combination makes three very happy parties—the CFO, the COO and the customer(s) involved.

This may mean the such irrefusable offers may sometimes need to be tendered to the customer at a higher level than the typical “buyer.” Creating and presenting the offer may involve the CFO and COO in joint discussions with their counterparts in the customer’s organization, where the value of the irrefusable offer may be more fully understood and appreciated.

Establishing these offers and resulting agreements at higher levels knits the customer’s management team with you—the vendor’s management team—in a way that makes it increasingly difficult to dislodge the vendor from the customer’s new way of doing business. Customer loyalty becomes a strong factor at this point, and the number of “touches” between the customer and the vendor tend to increase over time.

[To be continued…]

Finding Common Ground Between CFO and COO–Part 8

[Continuation…]

Creating Irrefusable Offers: Example No. 1

A relatively small manufacturer had several large accounts in its market. However, due to the firm’s smaller size, the large accounts were quite reluctant to buy from it. Apparently, the buyers were afraid that the smaller manufacturer would not have the capacity to deliver the large quantity orders on time.

By setting about to understand its customers and its market better, this small manufacturer was able to discover that, while the larger accounts bought in large quantities—in order to get the price-breaks associated with such large quantity purchases—the firms did not actually consume the large quantities immediately. Instead, they ended up warehousing them for some period of time.

Here is the customizable/upgradeable offer that got the smaller manufacturer in the door with these big accounts:

“Agree to buy from us in the same quantities you have been buying from our competitors (e.g., 250,000 units at a time). We will match the competitors’ prices for these items during an introductory period—so you can gain assurance that we can deliver and you are fully satisfied with the quality. However, since you generally consume these at a rate of about 50,000 units a month, that is how we will deliver them to you and invoice you for them.

“In this way, we will save you the costs and headaches related to storing and handling the excess inventory. Additionally, you may customize your delivery rate—up to double—for any given month with just an email or a phone call to (XXX) XXX-XXXX and seven (7) days’ notice.

“Once you are fully satisfied with our service and quality, you may upgrade this plan by a) adding more products to the purchase agreement, and/or b) increasing your purchase volume on any product at special rates.”

This offer turned out to be a win-win. It helped the customers improve their results while allowing the small manufacturer to do business with the larger accounts without having to make additional investments in production facilities. (It was hard for the small manufacturer to produce 250,000 units at once, but they could easily produce and deliver 50,000 to 100,000 units a month without fail.)

This offer provided additional benefits for the large manufacturers: By taking delivery and being invoiced for the smaller quantities on a monthly basis, the large manufacturers actually experience improved cash-flow.

Creating Irrefusable Offers: Example No. 2

A pasta-maker wanted to take over a supermarket chain’s ordering process by employing vendor-managed inventory (VMI). When the chain’s management balked at the idea, the pasta company developed its own irrefusable offer. The pasta-maker said that they would park a truckload of pasta on the lot of the chain’s distribution center. If, at any time, the pasta-maker failed to deliver on-time what the chain needed, the chain could take whatever was short from the truck free of charge.

This irrefusable offer gave the chain’s management and buyers the assurances they needed to move ahead with the VMI plan. The pasta-maker, however, was so capable that the truck did not have to remain in the chain’s parking lot for long.

Here, again, we see the irrefusable offer being constructed around Toyota’s definition of quality—the customer’s measure of the experience and improved results. Also note that this irrefusable offer was targeted at a market of one with a consciousness of the customer’s specific needs and concerns.

[To be continued…]

Finding Common Ground Between CFO and COO–Part 7

[Continuation]

In Part 1 and Part 2 of this series, we introduced the following two diagrams as a pair:

 

This first is a generic statement of dimensions as “effectiveness” and “differentiation.” The second diagram restates these dimensions in terms familiar to anyone who has seriously touched upon constraints management or the Theory of Constraints. Here the dimensions are “Increasing Throughput” and “Breadth of Market through Irrefusable Offers.”

The concept was first introduced by Dr. Eliyahu Goldratt in his book It’s Not Luck. Later he clarified by saying, that a Mafia offer is “an offer [your trading partner] can’t refuse.”

But what, exactly, is an “irrefusable offer” (aka: “unrefusable offer” or “Mafia offer”)?

Irrefusable Offers

The concept behind the “Mafia offer” or the irrefusable offer is that it is an “offer you make to your market—your prospects and [or] customers—to make them desire your products or [and] services” [Theory of Constraints Handbook, p.604] so much that they simply cannot refuse to do business with you. And, to be effective, the offer must be one that your competition cannot or will not easily copy.

Rephrasing that statement using Toyota’s definition of quality, it means making an offer where the customer anticipates an experience and results that far excel anything else in the marketplace. Getting to this point requires the CFO and COO to understand the various market segments that they serve in fresh, new ways.

A good starting point to is to ask: “What is some part of my market or industry has a unique need—or a unique combination of needs—that is not being met by any of our competitors?” In order to gain this insight, the CFO and COO should begin to see how they can blur products into services and services into products.

Between you and your target markets sit several “customizable” options—the augmented product. For example, your market may be office supplies—rather generic. But the way you deal with that generic market can become a dramatic differentiator and lead to the creation of irrefusable offers.

• Product  - Consider the selection, quality and variety of your product offerings.
• Connection – Consider that the experience of doing business with a sales representative in person is different from doing so over the phone; a paper catalog is a different experience than buying on-line; even the quality of the on-line experience can make a difference (e.g., What does your Web store remember about your customers’ preferences in products, delivery methods, and so forth?)
• Speed – Buying a product that is delivered same-day is different that buying a product that is delivered tomorrow or next week
• Other intangibles – Taking credit cards for payment is a different experience than custom billing; Offering payment terms on major purchases is different from a one-size fits all policy on payments; Personalizing products—colors, sizes, quantities, imprinting, etc.—all change the customers’ experiences and results; ad infinitum

Beyond those augmented product options, today’s sophisticated trading partners are looking for even more, and rather than seeing these as insurmountable challenges, the CFO and COO should be joining forces to find ways to make some or all of these things happen.

• Customizable – More and more products and services are being made customizable to the customers’ specifications and desires.
• Upgradeable – Customers almost always see more value in products where the life-cycle is extended through built-in or optional upgrades. Consider, for example, smartphones and other mobile devices where the operating systems are automatically upgraded with little or no user intervention. Consider those products now being offered with guaranteed trade-in values at the end of a normal lifecycle. Consider those products that a modular, where the customer can start with the “basic” (lower cost) model and extend the product’s capabilities over time by purchasing add-on functionality.
• Online – Even greeting card companies are now offering “smart” greeting cards that are interactive with online services. This drives the customer experience into completely different realms when compared to the simple card-and-envelope. Consider the ability to now offer interactive online training to accompany a product or service purchase. The training need not be limited to only how to use the product or leverage the service. Why not consider customized training about how to best apply the product/service in a particular industry (for example) to increase profits for your customers?
• Anytime access and response – Firms are now offering online knowledgebases to help their customers get more out of the products and services their customers buy. But some have gone a step beyond. Some firms now proactively monitor their customers’ online activities on their website and, when it seems the customer may be having difficulty finding the solution to their problem, a remote agent offers interactive real-time customer support 24-hours a day, seven days a week.
• Learning, anticipating and filtering – As your customers interact with your firm, your firm needs to be constantly learning so that your firm’s response will anticipate your customers’ future needs and filter out those elements that are clearly of little or no use (at present) to your customers. It is wonderful if a hotel chain places in the guests’ rooms a complementary snack for members of its rewards program. But it is even better if, over time, the hotel chain learns that a particular guest prefers chocolate chip cookies to peanut butter cookies and Perrier to spring water, so that no matter which hotel the guest visits, his or her favorite snack is always what is provided.

[To be continued…]

Finding Common Ground Between CFO and COO–Part 6

[Continuation]

Now that we have laid the groundwork, let us begin our turn now to some specific strategies for uniting the CFO and the COO in common and practical actions. First, let us consider the proper priorities for action.

Priorities for Action

The CFO and COO should agree on the following general priorities for actions to be considered:

1. Efforts to Increase Throughput, including efforts to increase revenues and/or efforts to reduce Truly Variable Costs (TVCs)
   
2. Efforts to Reduce Inventories (or investments) or demands for new investments
   
3. Efforts to reduce Operating Expenses

“Why this order?” I hear you ask.

The Detrimental Effects Cost-World Thinking

Let me begin by saying that this order is based on the solid assumption that most companies—especially at this present time—have already trimmed away obvious waste in operating expenses. And, while most CFOs and COOs are focused on the “cost-cutting” as the road to higher profits, this is almost never the long-term result.

A study done some years ago regarding Fortune 500 companies found a trend: Among companies self-assessed themselves as being “cost-cutters,” nearly 40 percent of such companies were no longer in the Fortune 500 a decade or so later. Clearly, the focus on “cost-cutting” is wrong on the face of it.

Consider this: Any company can successfully reduce its “costs” and “operating expenses” to zero. It the easiest and simplest of maneuvers to be carried out jointly by the CFO and COO. All they have to do is close the doors to the business, fire everybody, liquidate everything, and go home. It’s done!

But, if you think I am being overly dramatic, consider the fact that cost-cutting is—by it’s very nature—an action driven inexorably by the law of diminishing returns. If the CFO and COO successfully collaborate to reduce costs and expenses by, say, ten percent in year one; then it will be very difficult to reduce costs and expenses by even five percent in year two while staying healthy. In year three it may be difficult to eek out a two-and-a-half percent reduction in costs and expenses. Each successive year, increasing profits through cost-cutting becomes more and more difficult.

Too soon, despite their very best efforts, the COO and CFO focused on cost-cutting are soon cutting away protective capacity and damaging the ability of the organization to recover from the occasional attacks of “Murphy” (Murphy’s Law). This, in turn, leads to reduced revenues and higher marketing costs as customer retention becomes that much more difficult over time.

For all of these reasons, we must agree to put efforts to reduce operating expenses at the bottom of the list. And because increasing throughput has no theoretical upper limit and is not affected by the law of diminishing returns, efforts to increase throughput should remain foremost in the thoughts of the CFO and COO seeking unified actions for ongoing improvement.

Clarifying Throughput

As a reminder, our working definition of Throughput is not some generic concept of increases in volume or output. It is carefully focused on a financial formula that the strategic CFO should readily accept:

Throughput = Revenue – Truly Variable Costs

Where Truly Variable Costs (TVCs) are restricted to those costs that vary directly (not through allocations or some estimated factors) with changes incremental revenues. Typically, TVCs would be found in raw materials, subcontract or other outside services paid for on a batch or per-unit basis, commissions, piece-rate pay for employees, and little else.

[To be continued…]

[Cross-posted at the Kinaxis Supply Chain Expert Community]

(c)2008, 2009, 2010, 2011 Richard D. Cushing

Finding Common Ground Between CFO and COO–Part 5

[Continuation]

A New Management Paradigm

Toyota’s success—despite Japan’s own significant recession in recent years—is attributable to management paradigms that differ significantly from traditional management practices in the U.S. Some of these are likely recognizable to you in the following table:

	Traditional Paradigm	New Paradigm
Customer requirements	Quantity	Quality – improved experience and results
Quality [1] improvement	Generally costly and tend to reduce productivity	Saves money while increasing throughput
Internal competition (through reward systems)	Produces conflict – a few win, but many lose	System-thinking eliminates internal competition leading to improved performance
Cooperation	Too frequently leads to reduced competitiveness	Brings improvement where many win – maybe, everybody wins
Management	Command and control	Creating a work environment that supports top performance of the system and ongoing improvement
Workers	Seek to satisfy or, at least, appease management	Work together with management to satisfy the customers’ demand for constantly improving quality
Worker evaluations and incentives [2]	Increases internal competition and produces little long-term improvement	Encourages better performance and ongoing improvement
Purchasing	Buy almost entirely based on cost metrics	Buy based on the system’s performance and build relationships with key vendors

Note: This table was adapted from work originally done by W. Edwards Deming.

[1] In the table above, we are employing the term “quality” just as it is described in the text [see Part 4]. However, the term “customer” may be an internal or an external customer. Work to improve quality coming from a vendor is an effort that improves the firm’s experience and results. Similarly, improving quality coming from operation ‘A', which hands off to operation ‘B’, improves the experience and the result of operation ‘B’ as the “customer” of operation ‘A’.

[2] With regard to “evaluations and incentives,” we are referencing the traditional individual performance metrics taken within silos of operations, rather than on the performance of the system as a whole.

All Profit Lies Outside Your Organization

Inside the four walls of your business, everything over which the CFO and COO have direct control can contribute nothing but cost or expense to the bottom-line. Every opportunity for making money lies outside the organization and, therefore, outside the direct control of management and executives.

You can make more money by buying smarter—raw materials, services, et cetera—thus reducing truly variable costs (TVC) and increasing throughput. And you can make more money tomorrow than you are making today by selling smarter to existing customers, new customers or both.

These actions can have other affects, as well. The affects are depicted in the figure below.

 

A side-affect of buying smarter—what you buy, from whom you buy, how (delivery terms) you buy, and when you buy—is reducing inventory. The wonderful side-affects of reducing inventories—when done wisely as a result of system-thinking—are improved profits, higher ROI, and faster cash velocity.

You probably recognize all of these factors as improvements—improvements you would like to see, perhaps.

The new management paradigm unifies the CFO and COO by turning the organization from it navel-gazing introspection to a recognition that the customer is the most important part of the production line. No matter how you fine-tune your company’s internals, if the internals are not focused on the externals as the only source of profits, you are far more likely to create internal friction and heat without actually lighting a fire that will produce increased throughput and profit.

One of the advantages of the accompanying figure is the systemic clarity—the inherent simplicity—it delivers. It helps CFO and COO begin easily translate financial goals (i.e., net profit, ROI, and cash flow) into day-to-day actions (i.e., increasing throughput, reducing inventories and reduce or hold the line on operating expenses while support significant growth in throughput). [Note: For organizations that don’t have to deal with inventories, per se, the “inventory” may be broadened into “investment” or demand for capital investment. For example, if it is possible to reduce, defer or eliminate the need for an investment in new office space, then that would qualify as a “reduction” in the demand for new investment.]

[To be continued…]