Integrating Sales & Integrating Sales & MarketingMarketing

~~The Lean Business The Lean Business

ModelModel

“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

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2 COMPANIES – BOTH EXPERIENCING 5% AVERAGE ANNUAL GROWTH

ONE IS PROFITABLE – ONE IS NOT

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THE DIFFERENCE IS IN HOW THEY MANAGE CAPACITY

THE UNPROFITABLE COMPANY HAS MANUFACTURING CHASING SALES AND IS ALWAYS IN A CAPACITY

MISMATCH

capacity

sales

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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 The Concept of ValueValue

Becoming a Value Driven Becoming a Value Driven ManufacturerManufacturer

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 competit

or 1 spent to create actual value

What competit

or 2 spent to create actual value

What competit

or 3 spent to create actual value

waste

waste

waste

waste

TOTAL COST

YOU

TOTAL COST

COMPETITOR 1

TOTAL COST

COMPETITOR 2

TOTAL COST

COMPETITOR 3

PRICE

PRICE

PRICE

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

waste

waste

waste

Your customers could not care less about either your costs or your profit

PRICEPRICE

PRICE

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

PRICEPRICE

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

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

PRICEPRICE

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

PRICEPRICE

What you spent to create

actual value

What competitor 2 spent to

create actual value

PRICES

WASTE

What you spent to create actual value

What you spent to create actual value

WASTE

PRICES

What you spent to create actual value

WASTE

PRICES

PRICES

WASTE

What you spent to create actual value

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

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

What you spent to create actual value

WASTE

PRICESIts 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

YOUEND

CUSTOMERYOUR

CUSTOMER

The end customer in the chain determines Value

Not You

Not your customer

VALUE is a combination of:QUALITYUTILITY

RELIABILITY

YOUEND

CUSTOMERYOUR

CUSTOMER

You create value by improving your customer’s Value Adding

Ratio

VALUE

WASTE

YOUEND

CUSTOMERYOUR

CUSTOMER VALUE

WASTE

YOUEND

CUSTOMERYOUR

CUSTOMER VALUE

WASTE

Jumping out to the end of the chain to

get a clear understanding of

value is Wahl Clipper’s forte

YOUEND

CUSTOMERYOUR

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 forserious discussion

in between

ScrapInspection

Paper PushingMaterial Handling

Direct MaterialsApplied 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

#1Value 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?

#2Sales 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

ROIInventory is an

asset

Flow basedCash & 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 basedCash & 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 VALUEIS DEFINED

STANDARD COSTS

MACHINES SUPPLIERS

CAPACITY

HOW VALUEIS 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 forserious discussion

in between

ScrapInspection

Paper PushingMaterial Handling

Direct MaterialsApplied Direct Labor

Machine Operating Costs

Your consensus understanding of the value proposition will

be continually sharpened