It's Not Luck - Eliyahu M. Goldratt [98]
He’s not cooperating, but I see a way to use what he’s said. Maybe it’s not fair, but we have to make progress. I look at Joe, at the cloud and then turn to face the group. “So Joe doesn’t think that our assumption is valid. Reducing prices is not the only way that we can respond to the customers’ financial pressure. For example, as Joe said, we can respond to their financial pressure by giving them spare parts on consignment.”
Joe is too flabbergasted to speak.
Phil, the sales manager for the East Coast, can’t take it any longer. “But sir, what’s the difference? Isn’t consignment just another way to reduce prices?” If it weren’t for my position, he would have been more blunt. That’s for sure.
“Phil,” I patiently say, “there is a vast difference between reducing price and giving spare parts on consignment.”
“I don’t see it,” Joe returns to the battlefield.
“Let me demonstrate it by an example. Suppose that a client holds one hundred thousand dollars worth of spare parts, and he uses, on average, about ten thousand a month.” I write it on a transparency. “A typical medium-sized client. What will be the financial impact on the client, if we reduce the price of spare parts by ten percent?”
“That will be a disaster,” Phil cannot restrain himself. “We’ll lose income, and I don’t think that we’ll increase our spare parts, sales by even one unit. Are we really going to do that?”
“We are only going to do things that make business sense,” I assure him. “At this stage we are just trying to answer your question, what is the difference between reducing price and consignment? You claimed that there is no difference. I claim that there is. Shall we find out?”
Nobody is happy. I hear murmurs of “Academic discussion.” “We shouldn’t waste our time on that.” “Let him continue.”
I ignore it, point to the numerical example and repeat my question to Joe. “What will be the impact on the client’s finances?”
“If we reduce our spare parts’ prices by ten percent, then we’ll get one thousand dollars less per month. That’s all. It doesn’t look to me like a sensible business decision.” Joe insists on not looking at it from the client’s point of view.
As long as I do not bring them to see their offering from the market’s perspective, we don’t stand a chance of developing anything meaningful.
“In other words,” I rephrase his answer, “the client will have a direct positive impact of one thousand dollars a month on his profit and the same for his cash. Now suppose that instead we offer—from now on—to give him spare parts on consignment. What is the financial impact? On the client, not on us.”
Joe doesn’t answer.
Phil says, “For the impact on the client’s finances we have to ask his comptroller.”
I ignore him and continue to talk to Joe. “Joe, if we switch to consignment, what must happen? The first month the client takes from his inventory the equivalent of ten thousand dollars. We replenish it, but on consignment terms. The result is that the client improved his cash by ten thousand dollars and reduced the inventory he holds on the books by the same amount. This means that our offer is very attractive to him, much more than giving a ten percent price reduction.
“Now the month after that, the client . . .”
Joe can’t take it any more. “Yes, our offer is very attractive to him. No wonder, his cash improves by ten thousand dollars, our cash suffers by the same amount. His inventory is reduced by ten thousand, ours went up by the same amount.”
“Not correct. Steve?”
Steve, Pressure-Steam’s controller, answers as I expected. “Our inventory will go up only by two thousand five hundred dollars. That’s the value that we carry on our books. We don’t carry inventory at sales value.”
“So what.” Joe is very upset. “Excuse me, but if you are going in