Manufacturing Breakthrough Blog

Viable Visions: The Impact of a New Frame of Reference

Friday August 12, 2016

Review

In my last post I presented the new frame of reference – part II: The five focusing steps. This, along with Throughput Accounting gives us a way to overcome the distortions caused by cost accounting. In today’s post we will look into how your new frame of reference can impact your marketing efforts and the corresponding impact it can have on our Viable Vision strategy. 

Marketing

As I told you in my last post, about 70 percent of companies today are constrained by the market, meaning that if the company had acquired more customer orders, they could fill them because they have excess capacity.  So why is it that most companies struggle to get more orders? And even companies who have enough orders today, their competitors seem to be able to easily copy what they’re doing and take more offers from them.  Successful marketing efforts should be able to capture and keep significantly more orders.  So why isn’t this happening?

One of the problems is that the silo approach has many companies focused inwardly which causes them to waste real future prospects.  What I mean by that is that many companies focus on their own product features rather than what really matters to their prospects and customers.  And to make matters worse, they then look at all of their costs in bringing a product to market and allocate costs from all of the overhead departments to come up with their final sales price.  This perception of value, based on cost, is then passed on to those companies shopping in the market.

Here’s the problem with this perception. The perception of value that is really important to the customers and prospects is almost entirely based upon what problems the product helps them overcome in their environment as well as the resulting benefits.  The fact of the matter is, the greater the problems the product overcomes, the greater the customer’s perception of value.  Marketing’s job then is to increase the customers and prospects perception of value of the product, compared to all other competing products in the market!  In addition, marketing must price their products based on this value and not pricing based on cost allocations.  The cool thing is, if the perceived value is real, then higher prices will actually be possible!

Exploiting the Marketing Constraint

Since we already know that the constraint is in marketing, step 1 of the five focusing steps (i.e. Identify the system’s constraint) has been completed.  So how do we complete step 2, decide how to exploit the system’s constraint?  It’s really quite simple, in that we must overcome the internal belief that our product features alone will attract more customers and prospects.  We must change the perception of value to what customers and prospects believe it is.  That is, what problems exist that our product could help them overcome? It should be obvious that one of the first steps in changing your perception of value is to have conversations with a valid sampling of existing customers and potential prospects.  Suppose you had that meeting and the majority of your sampling told you that they would have bought your product if your lead time was much shorter.  Knowing this, your company could then look at all of the criteria that impact lead times and take action to correct (shorten) it.

Several posts back we talked about mafia offers, so what do you suppose would happen to your sales if you took this new marketing criteria and built a good mafia offer?  It’s really a question of determining what problems do the customers and prospects in your markets have that no one in your industry is addressing and solving?  This question truly is the core of what kind of market research your company employs.  The surprising fact is that many times addressing these problems does not require new products at all, just how you deliver them.

What it does require is that all functional departments must work as one to deliver value to your customers and prospects.  It requires marketing to determine what your customers and prospect consider value to be.  It requires that operations, using the five focusing steps (and possibly engineering), must constantly identify and exploit the existing constraint so as to continually shorten lead times while maintaining high levels of quality.  It requires sales to not over-sell the capacity of the operation and that they develop a sales pitch, built upon a good mafia offer.

Gerald Kendall [1] provides the new “operational rules” for companies wanting to realize the impact of the Viable Vision. What I have included below are the key rules, but for a complete listing, read Kendall’s book.

  1. In finance and measurements, the new rules are:
  • Decisions are made in accordance with their impact on T, I, and OE.
  • Cost allocations are abolished as well as all profit center reports
  • Throughput accounting is implemented for decision making
  1. In operations, some of the most important new rules are:
  • Local efficiencies are used only at the constraint
  • Lead times and WIP are monitored with the data and reports to support decisions to reduce both
  1. In distribution, the new rules are:
  • Inventory is located where it makes the most sense, including a substantial inventory at the plant warehouse
  • Inventory is replenished through a pull system, based on what was sold
  • Order lead time is cut dramatically by having software to generate and transmit orders automatically to suppliers which are based on previous period consumption, seasonality, etc.
  1. In the supply chain, the new rules are:
  • Every link acts in accordance with Throughput $ Days reports, striving to drive it to zero
  • Collectively, the links look at Inventory $ Days reports, striving to reduce total inventory in the supply chain without impacting customer service

The good news is, for the most part, the raw data to implement the new rules already exist in most ERP systems today.  What is missing is the linking of the various systems across the supply chain, with the implementation of the new rules for decision-making.

This completes my discussion on Viable Vision, but I highly recommend that you purchase Gerald Kendall’s excellent book, Viable Vision – Transforming Total Sales into Net Profits.

Next Time

In my next post, we will begin discussing a new continuous improvement subject. As always, if you have any questions or comments about any of my posts, leave me a message and I will respond.

Until next time.

Bob Sproull

References:

[1] Viable Vision – Transforming Total Sales into Net Profits, Gerald Kendall, 2005 self-published

[2] The Goal – A Process of Ongoing Improvement – Dr. Eliyahu M. Goldratt and Jeff Cox, The North River Press, 1984

 

 

Categories :

Leave a Comment (Please Log In First)