Theory of Constraints Handbook - James Cox Iii [418]
If the forecast is high, they end up with too much inventory of some labels. High inventory levels increase the likelihood of damage or obsolescence. In addition, high inventory results in higher carrying costs and cash tied up in unneeded inventory, and causes the company to hesitate before making any label changes.
Therefore, our analyses12 lead to the following Mafia Offer:
“Mr. Customer, don’t give me orders. Your orders are based on your best guess of how many labels you think you might need. That’s because label printers put that price per quantity curve in front of you and force you to have to guess out six months. The forecast ends up being wrong, and how can it possibly be right? Instead, tell us every day how many labels you use and we can guarantee, on the one hand, that you won’t have to hold more than two weeks’ worth of labels. And you know how your marketing department was complaining that they can’t make the changes they want because you have six months worth of inventory? Well, now you will only have two weeks. At the same time, we will guarantee that we never stock you out. We will guarantee that you’ll never go to the shelf and not have the label you need. And if we ever do stock you out, we will pay you $500 per day per label. We offer all this at the same competitive price you pay today and of course you will have a lot less of your cash tied up.”
The Test—Is It a Mafia Offer?
Let’s test that offer against our definition. Is the offer so good our customers can’t refuse it? Well, that depends on the customer. If we have done a good job with our analysis, it should be unrefusable to 80+ percent of the target market. Realize that no offer will be 100 percent accepted by any market. There will just be some people, for whatever reason, that won’t find your offer compelling.
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“Reason is not automatic. Those who deny it cannot be conquered by it. Do not count on them. Leave them alone.”
—Ayn Rand
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When we develop a Mafia Offer, we start by asking to whom will the offer be made? We select a target market—a type of customer. The market we select can depend on a number of issues; for example:
What market do we want to grow?
What market has the best margins?
Do we have too much business with one customer or in one market?
Which customers or types of customers do we dread? (If our competitors also dread these customers, they may be more easily acquired.)
What market has tons of room for us to grow?
However, the key is that our analysis is done with this target market in mind. In our example, most of the label company’s customers were regional-sized food and beverage manufacturers. The offer was developed for those customers and prospects.
Equipment manufacturers also purchase labels. However, this offer would not work for them. They typically know that they are going to produce 100 machines this year and they know they will need 500 labels for those 100 machines. They do not have a forecasting problem to the same extent that food and beverage manufacturers do. They would not likely be moved by our offer, so our prospecting attention would be better spent on food and beverage manufacturers who struggle to keep the correct mix of label inventory while still having a mountain of inventory.
So why is the label company offer unrefusable to food and beverage manufacturers? Let’s make a list:
It reduces their inventory from about 6 months to 2 weeks.
It reduces the amount of cash they have tied up in inventory.
It eliminates the chaos that results when a stockout occurs.
It reduces the costs associated with stockouts—down time, expedited shipping, and overtime.
It reduces the inventory carrying costs.
It reduces inventory obsolescence