building the cash machine (sales team and sale process management) (red)

Applications of Theory of Constraints (TOC)

Sales management for a

small and medium business

Are organizational solutions for large

firms fitting the SMB environment?

Alex Klarman, Ph.D. Richard Klapholz MBA

Goldratt Institute (Israel)

2

This presentation contains material that is the intellectual property of the

Goldratt Institute (Israel) and may not be reproduced or distributed in any form, in whole or in part, without

the prior written consent of Dr. Alex Klarman and the Goldratt Institute (Israel).

© 2013 Goldratt Institute (Israel)


Sometimes some people are over-valuated, while they are under-valuated.

Some people are deeply frustrated.

Sometimes people feel that what they do is contrary to the common sense.

Organization witness walls of mistrust (or even hostility) between functions and levels.

Sometimes, people’s performance is

evaluated arbitrarily.

Sometimes, some of the organizational performance

measurements don’t contribute to its goal.

Sometimes there is back-stabbing or politics

in an organization.

The blaming mentality Ït’s your fault”

is common .

The cya (cover your rear part) mentality is common.

People will conform even to a counterproductive standards.

Some people develop apathy.

3 © 2013 Goldratt Institute (Israel)

Human behavior at organization - Negative aspects UDE’s (Un-Desirable Effects)

10/24/2013 ©Avraham Y. Goldratt Institute,

2000 tbh

1.4

• These people are horrible! • Our solution might be to get rid of all of these people

and start over, or bring in a whole team of organizational psychologists.

• What are some of the other popular methods being used to deal with such problems?

• Are the problems going away? • How long have these problems existed? • Realistically, do you think these problems can be fixed

once and for all?

Just looking at this list of symptoms, our initial conclusion will probably be:

Frustration seeks an outlet

Usually, people are measured by the degree of an adherence to their standards or measurements.

Satisfaction at work, doing what’s right, is

very significant to people

Sometimes people feel that what they do is contrary to the common sense.

The finger pointing mentality (“It is his/her

fault!”) is common

Sometimes there is politics and/or behind-the-scene

maneuvers in an organization.

People’s intuition is usually good.

The cya (cover your rear part) mentality is common.

Sometimes, some performance measurements don’t contribute

to organization’s goals.

Some people develop apathy.

Sometimes, people’s performance is

evaluated arbitrarily.

Sometimes some people are over-valuated, while they are under-valuated.

Some people are deeply frustrated.

Organization suffer “walls of mistrust” (or even hostility) between functions and levels.

People will conform even to a counterproductive

standards.


Sometimes, some performance measurements don’t contribute

to organization’s goals.

Human Behavior’s CRT


2000 tbh

1.6

• What’s the solution? • How do we make sure it yields the desired results? • How do we make sure that “the medicine isn’t more

harmful than the disease?” • Have you ever had a great idea that never got implemented

because of all the obstacles to implementing it? • Have you ever heard of peoples’ “resistance to change?” • Have you ever seen organizations fail at implementing what

appeared to be great solutions?

Identifying the Core Problem helps us identify precisely where to focus our improvements.

But that’s just the beginning!


2000 tbh

1.7

If we’re going to ensure that our improvement efforts yield results, we’re

going to need more than a tool that helps us identify

What to change! We’re going to also need tools to help us

figure out To what to change

and How to cause the change!


2000 tbh

1.8

1. What to Change?

2. To What to Change?

3. How to Cause the Change?

Rigorously answering these three questions is essential to achieve any significant and sustainable

improvement, and provide the framework of the TOC Thinking Processes.

Sales’UDE’s (Un-Desirable Effects): 11. In many SMB firms the same sales people do: • Sales to new customers; • Sales accounting; • Even do customer support (after the contract is signed)

18. Internal meetings of sales department are not regular.

22. Internal meetings of sales department take too long and are quite ineffective.

20. Export reps often complain that the product/service lacks a

clear-cut competitive edge.

17. Sometimes, sales people even work on service delivery.

15. Monthly / quarterly quotas push sales people to

hurry up to close deals by the end of the term with a huge

scrap rate and steep discounts.

13. Usually, sales people

work quite autonomously.

16. Customer support urgent requests trump (= have higher priority than) planned tasks in

sales area (reactive vs. proactive).

14. Monthly/quarterly quota ( = revenue target) is the main measurement for sales people

19. Export reps (who reside in foreign country or a segment of a market) work autonomously

usually achieve low results. . 21. Sales proposals are often

schematic, or hastily prepared, based upon a personal impression

of what might work, not on its value for a specific customers

12. Usually, in SMB firms there is no clear sales pipeline, no processes (steps/duration), no clearly defined roles, no real sales management…

23. The success rate (hit ratio)

of the sales people (local and foreign) is quite low.

9 © 2013 Goldratt Institute (Israel) 9 © 2013 Goldratt Institute (Israel)

13. Usually, sales people work quite

autonomously.

11. In many SMB firms the same sales people do: Proposals and sales to new customers; Sales accounting; Even do customer support work (after the contract is signed)

18. Internal meetings

of sales department are often irregular.

17. Often internal meetings of sales department take

too long and are quite ineffective.

31. An effective business proposition must have

a real value for the prospective customer 16. Customer support

urgent requests trump (= have higher priority

than) planned sales tasks (reactive vs. proactive).

12. Usually, in SMB firms there are no:

clear sales pipeline management, clearly defined processes (steps/duration), clearly defined roles,

there is no real sales management…

34. Quite often sales offer to

prospects aren’t enticing enough.

30. Quite often, sales people are clearly overloaded.

21. Sales proposals are often schematic, or hastily prepared, based upon personal impression of what might work, not on

its value for a specific customers.

22. Sometimes, sales people even work

on service delivery.

23. The success rate

(“the hit ratio”) of the sales people is quite low.


Sales in SMB: CRT of the negative aspects

31. A good business proposition must have

a real value for the prospective customer

21. Sales proposals are often schematic, or hastily prepared, based upon personal impression of what might work, not on

its value for a specific customers.

32. Measures are (one of the most) effective

tools in directing human actions

33. Haste or pressure aren’t a good advisor; Quite often they deter (or delay) the prospect

14. Monthly/quarterly quotas (or revenue target) are the main measurement

for the sales people.

33. Quite often sales people are clearly

overloaded.

20. Export reps often complain that the product/service lacks a clear-cut competitive edge.

19. Export reps (who reside in a foreign country or at some

segment of a market) work autonomously

often achieve disappointing results.

.

34. Quite often sales offers to foreign

prospects aren’t enticing enough.

16. Monthly / quarterly quotas push sales people to hurry up to close deals

by the end of the term with a huge scrap rate and/or steep discounts.

23. The success rate (hit ratio) of the sales

people is quite low.

12. Usually, in SMB firms there are no: clear sales pipeline management, clearly defined processes (steps/duration), clearly defined roles, there is no real sales management…


Sales in SMB: CRT of the negative aspects

Richard Klapholz & Alex Klarman

The Cash Machine Sales Management acc. to TOC


1. Selection

2. Qualification

3. Needs Assessment

4. Letter of Understanding

5. Presentation Demo

6. Solution Proposal and Technical Check

7. Production Demo

8. Quotation Submission

9. Negotiation

10. Closing


The Selling Process: 10 Steps of Sale

1. Selection of inquirers

2. Qualification of inquirers (telephone or meeting)

3. Needs assessment I (meeting)

4. Needs assessment II (visit at plant, shop, organization...)

5. Presentation of suggested direction of the solution

6. Solution proposal and quotation submission

7. Negotiation

8. Closing



• Describe the selling process as a PROCESS - a clearly defined sequence of dependent steps

• Apply the TOC approach: 1. Identify the constraint

2. Exploit the constraint

3. Subordinate all other processes to the constraint

4. Elevate the constraint

5. Start all over again from step one


A systematic approach - TOC

1. Selection

2. Qualification

3. Needs Assessment

4. Letter of Understanding

5. Presentation Demo

6. Solution Proposal and Technical Check

7. Production Demo

8. Quotation Submission

9. Negotiation

10. Closing 17



Closed Orders

Key parameters input to output: - Ratio - Time

Qualified Prospects

- -


The funnel concept:


Steps of sales integrated in the funnel:

Selection

Presentation Demo

Solution Proposal & Technical Check

Production Demo

Quotation Submission

Negotiation

Closing

Qualification

Needs Assessment

Letter of Understanding

• How many sales resources do you have? • How many accounts do they cover? • How many ongoing opportunities do they

manage? • How long is the sales cycle? • What is the size of the average sales order? • What is the typical hit-ratio of closed orders

out of the total of qualified prospects as they go through the sales cycle?


In your company:

• How many sales resources do you have? 40 • How many accounts do they cover? 30 (each) • How many ongoing opportunities do they

manage? 7 (each) • How long is the sales cycle? 100 days • What is the average sales order? US$700,000 • What is the typical ratio of closed orders out of

the total of qualified prospects as they go through the sales cycle? 1:2.5


In a large company:

• How many sales resources do you have? 1 • How many accounts do they cover? 30 • How many ongoing opportunities do they

manage? 10 • How long is the sales cycle? 75 days • What is the average sales order? US$ 50,000 • What is the typical ratio of closed orders out of

the total of qualified prospects as they go through the sales cycle? 1:2.5


In a small (or a medium) company:

1 Sales Persons x 10 Ongoing Opportunities = 10 Prospects

75 Days 1:2.5 US$ 50,000 per order

(10 prospects/ 2.5 ) x US$ 50,000 = $ 200,000/75 days = $ 240,000 / quarter or @ $ 1 M a year

Closed Orders


Qualified Prospects

- -


A small company’s funnel:

Our FOCUS for TODAY:

TOC

• More prospects MARKETING

• Better ratio the ART of SALE

• Shorter sales cycle or higher efficiency

• Larger average deal MARKETING, R&D


How can we improve?

1. Identify the constraint – Production Demo’s – Solution Proposal & Technical Check

2. Exploit the constraint – Off load – Fully utilize demonstration capacity – Avoid bad multitasking

3. Subordinate all other processes to the constraint – DBR concept

4. Elevate the constraint – Add resources if necessary

5. Start all over again from step one 25 © 2013 Goldratt Institute (Israel)

TOC in the Cash Machine

1. Identify the constraint – Needs assessment I and II

2. Exploit the constraint – Fully utilize assessment capacity – Avoid bad multitasking

3. Subordinate all other processes to the constraint – DBR concept

4. Elevate the constraint – Add resources if necessary

5. Start all over again from step one 26


TOC in The Cash Machine

A

B

C

3 TASKS: A, B, C – each 30 days; one single resource

75 days

83 days

90 days


Multitasking (or truly BMT - Bad Multitasking)

A B C A B C A B C A B C A C B B B A A A C C time

B

IT TAKES 30 DAYS TO COMPLETE TASK A, BUT THE TASK IS ACTUALLY COMPLETED

AFTER 75 DAYS !!!

IF THERE WERE 20 TASKS, NONE WOULD BE PERFORMED IN THE SAME YEAR!!!

SOME PEOPLE IN OUR ORGANIZATION WORK VERY HARD EVERY DAY, BUT THEY DON’T

COMPLETE (ENOUGH) TASKS!!!


Amazing!!!

A B C A B C A B C A B C A B C B B B A A A C C time

A B C time

* Sales-support functions must be focused on assisting a well-defined and limited amount of sales opportunities.

** Resource buffers are strongly recommended.

A B C A B time

40 days 75 days 105 days


Focus!!!

Best case scenario:

Real-life scenario:

Don’t do it:

• In Goldratt’s Critical Chain – maybe some of you remember why all safety (in-process-buffers) were ‘consumed’ (or rather wasted) in most cases? – STUDENT SYNDROME (late start) – SOFTWARE ENGINEER SYNDROME (unneeded

optimizations) – “NEGOTIATED TIMES” WITH TASK MANAGER

(fear of late completion) – MURPHY (it’s real life, and s- -t happens)

• Why do most (or too many) sales happen late in the quarter? 30


End-of-the-quarter syndrome:

• The financial community measures businesses on a

quarterly basis, and most of the firms do the same.

• Customers order equipment/service as-late-as-possible

• All salesmen incentive plans are quarterly based

• The backlog of orders is not increasing

• There is no clear definition of delivery times


The core reasons for the end-of-the-quarter sales syndrome:

Our FOCUS:


The core reasons for the end-of-the-quarter syndrome:

• The financial community measures businesses on a

quarterly basis, and most of the firms do the same.

• Customers order equipment/service as-late-as-possible

• All salesmen incentive plans are quarterly based

• The backlog of orders is not increasing

• There is no clear definition of delivery times

• The standard plan of a sales person – 1.1 M$: – Q1: 0.20 M$ – Q2: 0.28 M$ – Q3: 0.27 M$ – Q4: 0.35 M$

• As it was “negotiated” with Sales, it is probably not that aggressive… – Late start is guaranteed… – Risk of long sales cycles is high…


Sales incentive plans – current:

• “The Cash Machine” plan – 1.10 M$: – Jan. – Dec.: 0.11 M$/Month – Annual buffer of 0.22 M$

• The culture of measuring Sales is transformed – Aggressive from day 1, but no punishment on not

reaching the monthly target. – Annual view enables management to constantly

monitor the buffer and take constructive corrective actions in time.

– For the sales people - no time to optimize, late start not possible, non-negotiated monthly target.


Sales incentive plans – TOC:

Closed Orders


Qualified Prospects

- -


If we have the funnel concept; from-prospect-to-order chain:

Cash or Sold finished-goods

Key parameters input to output: - Ratio or Yield - Time or Lead-time

Qualified Prospects

- -


…then why not the: from-prospect-to-cash chain:

Function Process

MARKETING I. Awareness creation II. Interest incitement III. Knowledge transfer IV. Lead generation

SALES 1. Selection 2. Qualification 3. Needs assessment 4. Letter of Understanding 5. Presentation demo 6. Solution proposal/technical check 7. Production demo 8. Quotation submission 9. Negotiation 10. Closing 37 © 2013 Goldratt Institute (Israel)

Lets us understand the prospect-to-cash chain:

Function Process

ORDER ADMIN. I. Order received basic checks II. Approval cycle III. Product customization/integration acc. to

customer order, testing and packing IV. Installation call for customer services V. Shipping

FINANCE Invoicing CUSTOMER SUPPORT 1. Unpacking 2. Installation of separate components 3. Networking of the entire system 4. Application and workflow set-up 5. Customer training 6. Acceptance test

FINANCE Cash collection 38 © 2013 Goldratt Institute (Israel)

Lets us understand the prospect-to-cash chain:

A Run an efficient Sales operation

B Make sure

unnecessary expenses are blocked

as soon as possible

C Make sure

operations are not delayed by

unnecessary activities

D Introduce In-Process

cost-control steps

D’ Prevent the

introduction of In-Process

cost-control steps


About the approval cycles:

A Maximize the

business potential of new products

B Beat competition and overcome losses due

to early phase-out of older products

C Ensure full product functionality prior

to full customer availability

D’ Launch new

products only after all customer

tests are successful


The link between new product introduction and cash generation:

D Launch new

products as early as possible

Cash or Sold finished-goods

Key parameters input to output: - Ratio or Yield - Time or Lead-time

Qualified Prospects

- -


Some lessons learned and their analogy in Sales Management:

PRODUCTION WORLD: • “Reaching a local optimum in one area of the

production floor does not really help to ship more finished goods, unless it’s at a bottleneck”

CASH MACHINE WORLD: • “We decided to increase the capacity of our ability

to submit quotations to our customers. We invested a lot of efforts there…

• ... but then we discovered, I must admit, that it was all in vain. It didn’t help to increase sales one bit”



PRODUCTION WORLD: “‘Drum, Buffer, Rope’ describes the way material moves

on the production floor; this means that we release raw material to the floor only

at the pace of the bottleneck. That’s the DRUM according to which beat the entire system marches.

• BUFFER is a work-in-progress released into the system and awaiting processing in front of the bottleneck…

• ROPE is the mechanism that ties the introduction of additional material into the process to the pace of the work of the bottleneck.”



CASH MACHINE WORLD: • “We got many customers, but we got stuck with

too much work-in-progress. • In other words, installations that we could not

complete, and turn into cash. Who cares about that one?

• The marketing folks were happy as we got many orders. Unfortunately, the question ‘so what?’ applies here fully.”



PRODUCTION WORLD: • “Another problem is set-up. In order to improve local

efficiencies, we worked with big batches; we used to produce a maximum amount of parts after a long set-up. Now, we do as many set-ups as needed in non-bottleneck resources, so that the bottleneck resource can be fully utilized”

CASH MACHINE WORLD: • “We could have diverted our sales efforts from hardware

sales to software sales..…..there isn’t much sense in pushing our guys to sell more machines, when we don’t have resources to install them” 45



PRODUCTION WORLD: • “I think that the best lesson of all is the fifth

step in constraints management: start all over again. But don’t let the inertia take control. This is a never-ending story”

CASH MACHINE WORLD: • “Yes, to a certain extent we did that, too. I think

that we crossed all departments in the last twelve months” 46



1. Sales Managers focus on THE SALE, not on the SALES OPERATION. They assume that: – They better focus on what they know well (vs. what is important) – There is no systematic methodology to improve the Sales

Operation 2. They behave as if Sales process is an “isolated island” in

the company – one which takes the products or services and get customer orders!


So what’s our main problem?

Both are mistaken: Sales are an operation, quite a complex one, and all the rules of operational management apply here. Sales are just a part, albeit a crucial one, of a larger system and should act accordingly.

Thank You!


Alex Klarman, Ph.D.

Alex Klarman - As the CEO of the Goldratt Institute (Israel), Dr. Klarman is leading the effort to introduce TOC to, and establish it as the standard management approach in Israel, as well as worldwide. His background - Ph.D. in biophysics, as well as his industrial and educational background, including long years of hands-on experience in industry, makes him exceptionally fitting to this demanding undertaking. As the commanding officer of Dr. Eli Goldratt during decades' long service the Israeli army, Dr. Klarman became familiar with the early concepts of OPT and TOC almost three decades ago. Since 1985 he took a major part in the drive to develop, disseminate and apply TOC. Dr. Klarman’s work included developing the educational materials and simulators used in various areas of TOC education, as well as the implementation work with some of the leading world-class corporations including the likes of Ford, Phillips, Intel, Teva and Microsoft, as well as many, many others.

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Tel: +972-9-950-7464 Fax: +972-9-950-7463

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50

Dr Alex (Alik) Klarman – only what truly matters: Alex was born in Frunze (today it’s Bishkek) the capital of Kyrgizstan – you sure know where it is. He got his Ph.D. in biophysics (the molecular architecture of very old and very large proteins) at the Biochemistry dept. of Tel-Aviv University – raise your hand, if you want to know more. As a major (reserve) in the Israeli Army he was Eli Goldratt’s Commanding Officer in two wars – and both survived (how?). His wife, Dr. Uki Maroshek (the intellectual part of the family) manages the Adam Institute in Jerusalem – but Alex cooks. Well. Has four sons - Dan, physicist (happens), Uri - computer science, Shauli - finished his army service (+) and has just started college, and Joav - the youngest, who is now in the Army. His previous book (together with Richard Klapholz), The Cash Machine , on sales management acc. to TOC , was already translated from English to Polish, Lithuanian (yes, that’s right!), Chinese, Japanese and is soon to appear in German and Hebrew.

His latest book , also with Richard Klapholz, Release the Hostages, regarding customer support systems acc. to TOC, was published in 2009 in US.


building the cash machine (sales team and sale process management) (red)

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