Theory of Constraints Handbook - James Cox Iii [419]
It provides increased marketing opportunities when you can quickly make changes.
It eliminates the need to place orders and do forecasting, therefore freeing up that time for other activities.
And, all that is realized for the same price.
Therefore, we can conclude that this offer is unrefusable to our target market, but can our competition match it? We are asking our customers to hold 2 weeks’ worth of inventory, down from about 6 months. What’s the competition’s lead time? If you recall from our analysis, the standard lead time was 2 weeks with 90 percent DDP. Therefore, there is no way our competitors could match the offer and not have to pay penalties or to hold a substantial amount of inventory at their risk.
As it turned out, we improved our flow from over 2 weeks to just 2 days (while sales and staffing remained constant), establishing the basis for a nice decisive competitive edge. Therefore, we should never have to pay a penalty as long as we are paying attention and we know how to react to the daily consumption data. So, this offer does meet the two requirements for a Mafia Offer. It is an offer the customer can’t refuse and the competition can’t offer the same.
What Did It Take to Make the Offer?
In addition to improving operations by implementing Simplified Drum-Buffer-Rope (S-DBR),13 the label company had to change their thinking in a number of areas. First, their offer would require that they do more setups. Ask any label printer how much it costs to do a setup and they will tell you to the penny. However, how much does it really cost?
Nothing. You don’t pay your employees by the setup, and you don’t pay your machine by the setup. The only real cost is a little paper and ink to get everything lined up. This is so small and so hard to allocate an exact cost perfectly, I just think of it as nothing. However, the label company’s competition thinks that there is a real cost and even if they could match the offer, they don’t want to! They think the label company’s costs will increase and they will go out of business.
The whole reason the industry uses a price per quantity curve is to save these setups. However, saving setups is about printing, about our costs, it’s not about the customer. In fact, our analysis showed that the price per quantity curve leads to the need for our customers to forecast. And that leads to a number of negative effects.
So one of the biggest changes the label company had to make was in how they think about their costs. They had to understand that the true cost to do more setups was practically nothing and saving time on a non-constraint would save nothing. Setups do take more time, but an interesting thing happens when you start to do something more often—you get better at it! The label company freed up capacity by not wasting production time making labels that were not needed. So despite the additional setups, flow through the label company stayed at about 2 days.
So there you have it, an offer that is so good our customers can’t refuse it and something the competition can’ t and won’t match! The competition will not match this offer for some period of time and maybe never. Therefore, we’ve built and capitalized on a very sustainable competitive advantage.
A Mafia Offer Is NOT . ..
Mafia Offers do not require an innovation. There is the innovation camp that believes the only way to gain substantially more sales is to innovate better and faster, the stuff your customers want. Some have even gone so far as to call your existing products, in your existing markets, a bloody red ocean due to all the fierce competition.
In the book Blue Ocean Strategy (Kim and Mauborgne, 2005), the authors contend that it is not possible, in most cases, to sell more of your existing products in your existing markets. They lay out a process for developing new products for new markets—a highly risky endeavor.
Innovation is absolutely necessary for long-term sustainability, no question. My issue with using innovation