Integrating Sales & Marketing ~ The Lean Business Model

“But we’re different” So we have to devise a way to deploy these principles that takes advantage of our unique circumstances Therefore we should keep doing things the way they have been always been done in our company

2 COMPANIES – BOTH EXPERIENCING 5% AVERAGE ANNUAL GROWTH ONE IS PROFITABLE – ONE IS NOT

THE DIFFERENCE IS IN HOW THEY MANAGE CAPACITY THE UNPROFITABLE COMPANY HAS MANUFACTURING CHASING SALES AND IS ALWAYS IN A CAPACITY MISMATCH capacity sales

THE PROFITABLE ONE USES PRICING AS THE MECHANISM TO KEEP THE TOTAL COST AT THE ‘SWEET SPOT’ OF OPTIMUM CAPACITY UTILIZATION sales capacity

THIS IS THE CONCEPT OF “FACTORY FIRST” AND IT IS THE ULTIMATE EXAMPLE OF COMPLETE INTEGRATION OF SALES AND MARKETING WITH OPERATIONS IN PURSUIT OF A COMPANY STRATEGY

The Concept of Value Becoming a Value Driven Manufacturer

COSTS PRICES Most companies take the simplistic, but logical, view that PROFIT is a function of PRICES minus COSTS If they can raise prices and lower costs they will make more money There is a bit more to it than that

What you spent to create actual value What competitor 1 spent to create actual value What competitor 2 spent to create actual value What competitor 3 spent to create actual value waste TOTAL COST YOU TOTAL COST COMPETITOR 1 TOTAL COST COMPETITOR 2 TOTAL COST COMPETITOR 3 PRICE You and your competitors want to charge a price that covers your cost and yields a profit

What you spent to create actual value What competitor 1 spent to create actual value What competitor 2 spent to create actual value What competitor 3 spent to create actual value waste Your customers could not care less about either your costs or your profit PRICE TOTAL COST YOU TOTAL COST COMPETITOR 1 TOTAL COST COMPETITOR 2 TOTAL COST COMPETITOR 3 They only care about what you are charging versus the value your product offers

Your customers could not care less about either your costs or your profit The money you waste on non- value adding activities does not enter into the price PRICE waste What you spent to create actual value What competitor 1 spent to create actual value waste What competitor 2 spent to create actual value What competitor 3 spent to create actual value waste

Your customers could not care less about either your costs or your profit You can charge more than these guys because you provide superior value PRICE What you spent to create actual value What competitor 1 spent to create actual value What competitor 3 spent to create actual value

Your customers could not care less about either your costs or your profit You better charge less than this guy because his product offers greater value PRICE What you spent to create actual value What competitor 2 spent to create actual value

PRICES WASTE What you spent to create actual value WASTE PRICES What you spent to create actual value WASTE PRICES

WASTE What you spent to create actual value WASTE PRICES Increasing Value Adding as a percentage of total spending is the critical objective – not reduction of overall costs

PRICES WASTE What you spent to create actual value WASTE PRICES The VALUE ADDING RATIO Value Adding Expenses ÷ Total Spending Is the Lean Metric

PRICES WASTE What you spent to create actual value WASTE PRICES Its companion is the Sales To Value Adding Ratio Sales ÷ Value Adding Expenses It assures that you have identified Value correctly and are effectively turning Value into revenue

YOU END CUSTOMER YOUR CUSTOMER The end customer in the chain determines Value Not You Not your customer VALUE is a combination of: QUALITY UTILITY RELIABILITY

YOU END CUSTOMER YOUR CUSTOMER You create value by improving your customer’s Value Adding Ratio VALUE WASTE

YOU END CUSTOMER YOUR CUSTOMER VALUE WASTE

YOU END CUSTOMER YOUR CUSTOMER VALUE WASTE Jumping out to the end of the chain to get a clear understanding of value is Wahl Clipper’s forte

YOU END CUSTOMER YOUR CUSTOMER VALUE WASTE While Kolberg-Pioneer and Barry-Wehmiller have proven adept at eliminating customer waste

After years of spending $17 on bottles of Matrix shampoo and conditioner, 28-year- old Ms. Ball recently bought $5 Pantene instead. “… I don't know that you can even tell the difference."

What you spent to create actual value WASTE With lots of room for serious discussion in between Scrap Inspection Paper Pushing Material Handling Direct Materials Applied Direct Labor Machine Operating Costs The critical role of marketing is to define the Value Proposition The critical role of management is to create a clear understanding of it The critical role of accounting is to identify and track it

PRICES Use 2 simple ratios to drive your business: VALUE ADDING COSTS NON- VALUE ADDING COSTS #1 Value Adding Costs as a % of Total Costs How much of the money you spend is going to creating value in the eyes of your customers? #2 Sales to Value Adding Costs Are the costs to create value for your customers translating into higher sales?

PRICES Value proposition is key – not lowest cost production VALUE ADDING COSTS NON-VALUE ADDING COSTS The result is a much higher proportion of their spending goes into value creation Resulting in premium pricing And higher sales

VALUE ADDING COSTS NON-VALUE ADDING COSTS PRICES The beauty of it is that by focusing on value rather than total cost, lean manufacturers typically become the lowest cost VALUE ADDING COSTS NON-VALUE ADDING COSTS

WE HAVE A PROBLEM WITH ACCOUNTING FOR MANUFACTURING

WE GOTTA GET THESE PEOPLE ON THE SAME PAGE

Investment Criteria Quality Systems Organizational Structure People Policies Performance Metrics Production & Inventory Control ROI Inventory is an asset Flow based Cash & Production Inspection Based Variable Cost Hierarchical Functional ROI – Labor Cost Subordinate Measures Push ERP Control at the source Fixed Cost Flat – Value Streams Quality Flexibility Bottom Line Pull Kanban

Investment Criteria Quality Systems Organizational Structure People Policies Performance Metrics Production & Inventory Control Flow based Cash & Production Control at the source Fixed Cost Flat – Value Streams Quality Flexibility Bottom Line Pull Kanban This is all about creating value by accelerating flow across the entire business at the lowest possible fixed cost base

FACTORY Best cost is achieved by simultaneously … Driving down the non-value adding cost base And continually increasing the rate of flow (cycle time) across that cost base

You can’t take away my standard costs !!! How am I going to set prices if I don’t know what anything costs ???

SALES & MARKETING OPERATIONS CUSTOMERS MARKET SHARE COMPETITORS HOW VALUE IS DEFINED STANDARD COSTS MACHINES SUPPLIERS CAPACITY HOW VALUE IS CREATED

Using a standard cost based approach to pricing, the products below some arbitrary rate would be candidates for a price increase, or being discontinued

We trashed these traditional unit cost/price numbers, rather than try to improve them

But we increased profits from $151,250 to $172,050

We did it by running price volume scenarios, Note that 3 prices actually decreased and 1 increased

Strategic pricing is an effort jointly driven by: Sales & Marketing Operations Accounting

Sales & Marketing Input: What is the sales strategy? Where do prices have to be to meet the target volume? What are the price volume relationships in each channel? Where are our competitors prices?

Operations Input: Where are the constraints? What is our capacity and how much is available? How much volume can we take on before we have to substantially add to our fixed cost base?

Accounting Input: Are we using the right numbers? If we cannot meet the pricing necessary to succeed in the market profitably, what are the targets for fixed cost reduction necessary to succeed? What are the implications of investments in constraint capacity?

The objectives are to: “Right Size” our share of the markets we are in Find the capacity ‘sweet spot’ that provides the best overall cost/volume combination Maximize value stream profitability (who cares about individual products?)

We have to focus the entire organization on profit No more worrying about functional departmental goals!

Replace Annual Budgeting with … Ongoing Strategic Planning & SOFP Sales & Operations Financial Planning

Pro Forma SOFP The format for … Customer selection & Pricing Capital investment decisions Supplier selection and pricing Make versus Buy Every relevant management decision

What you spent to create actual value WASTE With lots of room for serious discussion in between Scrap Inspection Paper Pushing Material Handling Direct Materials Applied Direct Labor Machine Operating Costs Your consensus understanding of the value proposition will be continually sharpened