In addition to a price per quantity curve, it was also standard practice for this label printer and its competitors to allow customers to spread the quantity across all their different labels. Therefore, if a customer needed 100 different labels they could spread the volume across all 100.

Next, we looked at the impact that the 2-week lead time with 90 percent DDP along with the industry practices have on the label company's customers. In other words, what negative effects for our customers are we causing because of our capabilities and how we sell?

In the case of this custom label printer, we selected a representative customer to understand the cause-and-effect relationship between how we sell and the impact it has on our customers. We selected a coffee roaster that purchased about 100 different labels and who, when they looked at that price per quantity curve, decided to purchase 6 months worth of labels at a time. Labels are relatively small and inexpensive, so holding 6 months of inventory was common.

FIGURE 22-2 Price-quantity curve To finalize the order of six-months worth of labels, the coffee roaster needs to determine how to spread the quantity across the 100 labels. How many French Roast, Columbian Roast, and French Vanillas were going to sell in each size bag? To do that they had to forecast out 6 months how many of each label they were going to need, which meant they had to guess: how much coffee all of us were going to buy; in what flavor; and in which size bag.

Now, if you only know one thing about a forecast, what do you know? That it's wrong! The only question is just how much is it wrong and in which direction?

Our practices cause our customers to have to forecast. What are the negatives that our customers would be experiencing from a wrong forecast? This is easy to check. I went into the customer service department of the label company and asked the customer service people two questions: 1. Do you ever get frantic calls from customers who have stocked out of labels? They said, "Yes, we get those calls all the time." What's "all the time"? They indicated they were getting 2 to 3 of those calls a week!

2. Does the opposite also happen? Do you have customers who typically order 6 months worth of labels, but it's been over 6 months since some of the labels have been reordered? Customer Service responded, "Yes, that also happens. In fact, the coffee roaster you were just asking us about called last week. They were frantic because they were out of Columbian Roast labels for their one-pound bags. And while we had them on the phone we asked them if they also wanted to order French Roast labels because it had been over 9 months." They responded, "We have enough French Roast labels for our grandchildren, so just send the Columbian Roast!" The customer explained that their lines had gone down when they ran out of labels and they needed them ASAP to fulfill an order. They asked the label company to ship them overnight.

Our practices force our customers to forecast. The forecast ends up being wrong in one direction or the other. If the forecast is low, their lines go down, causing them to lose productivity and to work overtime when they do finally get the labels in. Their costs also increase because, in addition to the overtime, they have to pay expedited shipping charges. In addition, the buyers are frantically working to get the labels in house and the line back up.

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.

"Reason is not automatic. Those who deny it cannot be conquered by it. Do not count on them. Leave them alone."

-Ayn Rand *

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 and there are fewer labels to damage if an incident should occur.

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 as your sole means for increasing sales is that it's short lived. How long do most innovations last? How long does it take your competitors to copy?

If new products and new markets are a risky proposition, why use innovation as your sole approach to increasing sales? And why would you take such a risky action if you could develop a Mafia Offer? The answer, of course, is you wouldn't. Nevertheless, innovation is the only logical alternative if you are not aware of TOC or Mafia Offers.

I would say the same thing about price. Price reductions can also be copied very quickly and do not typically provide a sustainable advantage. Therefore, Mafia Offers are not solely based on price.

In addition, remember this list: We have outstanding quality and it's better than the competition.

We have a great reputation.

We get good results for our customers.

We have very knowledgeable, great employees with low turnover.

We're very responsive.

We're very innovative, helping our customers to ...

You can trust us.

These are not the qualities of a Mafia Offer. Your competitors say the exact same thing. All good companies have these qualities or they wouldn't be in business for long. A Mafia Offer is not a list of strengths, a cliche, subjective, or offered by the competition.

In the custom label company example: The Mafia Offer was developed for a regular company with its existing products in its existing markets.

This company had no particular competitive advantage or innovation-no patent, no unique technology, the same equipment as competitors, and similar employees.

Yet, it was not based on a price reduction, not easy for the competition to follow, and so good that most customers would accept it readily.

Where to Start?

Should we improve operations or create a Mafia Offer first? We've done it both ways and either way works. But I like to start by developing the Mafia Offer. Once you have the offer, you know to what degree you need to improve operations.

More importantly, it gives you a reason to change. We have found that when we start with the offer, the client is more motivated to make the operational improvements. The operational improvements occur faster.

When we have worked with clients that have already implemented TOC in their operations, we often find that they have been giving away some or all of the improvements they've made. This is particularly true in cases where they had very bad DDP. They improve operations and then they give away the shorter lead times because they feel guilty about their past performance. Therefore, my recommendation is to create your Mafia Offer first, and then make the operational improvements necessary to deliver your offer.

However, before you make your offer there are some things you must do. Getting your operations in shape is paramount. The fastest way to kill a Mafia Offer is to not be able to deliver it. So, make sure you can deliver your offer by doing a couple of dry runs. Pretend that several of your orders or jobs are for your offer and see how you do. Alternatively, if you are going to guarantee a shipping date, determine how much you would be paying in penalties if every order were guaranteed.

Making sure your operation is ready for the offer is straightforward. However, you should also predict what could go wrong from both your perspective and your customers' perspective. This will help you to determine if you've missed anything and to create some of the details of your offer.

This is not permission to create a bunch of small print (weasel words) for your offer. The objective is to predict negative branches and to trim them. When in doubt, do not add weasel words; instead favor your customers' position.

Protecting yourself and looking out for your interests is what caused the negatives for your customer in the first place, so don't back track. But at the same time, don't put your entire business at risk.

Sustaining the Advantage and the Offer

Based on experience, a good Mafia Offer will give you years on the competition. The competition thinks your offer is going to put you out of business. It will take them some time before they even take a second look at what you're doing.

In this chapter, I have laid out a very nice Mafia Offer for a custom label printer. I have been using this example for years. I have been the keynote speaker at the Tag and Label Manufacturers Institute annual conference twice. And despite that, no direct competitor has copied this offer. It is true that the offer may not work perfectly for another label printer because it has different customers. However, at least some of it would be transferable. So why don't they do it? Why don't other industries who have similar industry practices with similar negative effects on their customers give it a go?

First, I think the "we're different" thought keeps us from going too far with it. Then, even if someone starts to look into it, they can get blocked in any number of ways. Developing and implementing the necessary changes for a Mafia Offer requires multiple paradigm shifts. In particular, it requires that you change the way you think. And changing the way you think about costs, setups, multitasking, WIP, scheduling, and how one is supposed to go about making money is very difficult. To make all those changes at once is even harder.

Most Mafia Offers, by definition, are not easily copied by your competitors, but another source of sustainability problems is you. Once you start making your offer and your sales start to increase, there are some potential negatives to success. The easiest way to avoid these negatives is by using TOC techniques and measures. Here are some watch outs: Your load relative to your capacity has increased, due to the increase in sales, which causes you to: start missing your commitments increase your quoted lead-times speed up operations or cut corners causing your quality to decrease The interest in your products/services is much higher than before the offer, so Some leads are starting to slip through the cracks Your customer service starts to decline The first step of your process, which is required for new customers (like design or engineering), has become a bottleneck If you continue to measure and pay attention, you should be able to avoid these problems. They are certainly predictable and if you pay attention to your load versus your capacity (in all parts of your operations and sales processes), then you can make the necessary preparations and responses.

Benefits to the Label Company We previously discussed why the Mafia Offer was unrefusable for the label company customers. But what are the benefits for the label company?

They stop the blah, blah, blah and sounding like their competitors. They can answer, "Why should I buy from you?"

Sales increase (and so do profits if the TOC logistics solutions are used to improve operations).

Time wasted producing labels that are not needed is eliminated.

They gain 100 percent supply for label stock-keeping units (SKUs) included in the program.

They substantially reduce the risk of losing a customer to a competitor over a small price reduction. Customers taking advantage of the Mafia Offer ask for long-term contracts.

They became better at doing setups, and can easily run small batches, increasing their flexibility and responsiveness to the market.

They became very good at adding new customers.

Cash flow improves due to smaller batches and more frequent billing based on replenishment that is more frequent.

It's a Business Deal