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)

© 2013 Goldratt Institute (Israel)

This presentation contains material that is
the intellectual property of the
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).

2


Human behavior at organization - Negative aspects
UDE’s (Un-Desirable Effects)
Sometimes, some of the
organizational performance
measurements don’t
contribute to its goal.

Some people are
deeply frustrated.

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

The blaming mentality
Ït’s your fault”
is common .

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

People will conform even to a
counterproductive standards.

Some people
develop apathy.

Sometimes there is
back-stabbing or politics
in an organization.

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

Sometimes, people’s
performance is
evaluated arbitrarily.
3


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

Just looking at this list of symptoms, our
initial conclusion will probably be:
• 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?
1.4

Avraham Y. Goldratt Institute, ©

10/24/2013

Human Behavior’s
CRT

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

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

Frustration
seeks an outlet
Sometimes people feel that
what they do is contrary
to the common sense.

The finger pointing
mentality (“It is his/her
fault!”) is common

Some people are
deeply frustrated.
Satisfaction at work,
doing what’s right, is
very significant to people
People will conform even
to a counterproductive
standards.

People’s intuition
is usually good.

5


Sometimes, some performance
measurements don’t contribute
to organization’s goals.

Sometimes there is politics
and/or behind-the-scene
maneuvers in an organization.
Some people
develop apathy.

Sometimes some people
are over-valuated, while
they are under-valuated.
Sometimes, people’s
performance is
evaluated arbitrarily.

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

Identifying the Core Problem helps us identify
precisely where to focus our improvements.
But that’s just the beginning!
• 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?
1.6


10/24/2013

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!
1.7


10/24/2013

Rigorously answering these three questions is
essential to achieve any significant and sustainable
improvement, and provide the framework of the
TOC Thinking Processes.
1. What to Change?

2. To What to Change?

3. How to Cause the Change?
1.8 Avraham Y. Goldratt Institute,

©

10/24/2013

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)

15. Monthly / quarterly

13. Usually, sales people

12. Usually, in SMB firms

there is no clear sales pipeline,
no processes (steps/duration),
no clearly defined roles,
no real sales management…

requests trump (= have higher
priority than) planned tasks in
sales area (reactive vs. proactive).

18. Internal meetings of sales

19. Export reps (who reside in

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

9


14. Monthly/quarterly quota

( = revenue target) is the main
measurement for sales people

16. Customer support urgent

quotas push sales people to
hurry up to close deals by the
end of the term with a huge
scrap rate and steep discounts.

department are not regular.

work quite autonomously.

foreign country or a segment of
a market) work autonomously
usually achieve low results.
.

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

17. Sometimes, sales people

even work on service delivery.

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

23. The success rate (hit ratio)
of the sales people (local
and foreign) is quite low.


23. The success rate

Sales in SMB:

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

CRT of the negative aspects

34. Quite often sales offer to

prospects aren’t enticing enough.

31. An effective 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.

30. Quite often,
sales people
are clearly
overloaded.

17. Often internal
meetings of sales
department take
too long and are
quite ineffective.

13. Usually, sales 18. Internal meetings 22. Sometimes, sales

people work quite
autonomously.

of sales department
are often irregular.

people even work
on service delivery.

12. Usually, in SMB firms there are no:

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

10


there is no real sales management…

16. Customer support

urgent requests trump
(= have higher priority
than) planned sales tasks
(reactive vs. proactive).

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)

23. The success rate

Sales in SMB:

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

CRT of the negative aspects
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.

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.

34. Quite often sales offers to foreign
prospects aren’t enticing enough.

19. Export reps (who

reside in a foreign
country or at some
31. A good business
often complain that
segment of a market)
proposition must have
the product/service
work autonomously
a real value for the
lacks a clear-cut
often achieve
prospective customer
competitive edge.
disappointing results.
.
12. Usually, in SMB firms there are no:
clear sales pipeline management,
clearly defined processes (steps/duration),
clearly defined roles,

20. Export reps

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.

11


there is no real sales management…

Richard Klapholz & Alex Klarman

The Cash Machine

Sales Management acc. to TOC

12


13


The Selling Process: 10 Steps of Sale
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
14


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
15


A systematic approach - TOC
• 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
16

5. Start all over again from step one

1. Selection
2. Qualification
3. Needs Assessment
5. Presentation Demo

6. Solution Proposal and Technical Check
7. Production Demo
8. Quotation Submission
9. Negotiation
10. Closing
17


The funnel concept:
Qualified Prospects

Key parameters
input to output:
- Ratio
- Time

Closed
Orders
18


Steps of sales integrated in the funnel:
Selection
Qualification
Needs Assessment
Letter of Understanding
Presentation Demo
Solution Proposal &
Technical Check
Production Demo
Quotation Submission
Negotiation

19

Closing

In your company:
• 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?
20


In a large company:
• How many sales resources do you have? 40
• How many accounts do they cover? 30 (each)
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
21


In a small (or a medium) company:
• How many sales resources do you have? 1
• How many accounts do they cover? 30
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
22


A small company’s funnel:
Qualified Prospects

1 Sales Persons
x 10 Ongoing Opportunities
= 10 Prospects
75 Days
1:2.5
US$ 50,000 per order

Key parameters
input to output:
- Ratio
- Time

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

23


How can we improve?
• More prospects  MARKETING
• Better ratio  the ART of SALE
Our FOCUS for TODAY:

TOC

• Shorter sales cycle or higher efficiency 

• Larger average deal  MARKETING, R&D

24


TOC in the Cash Machine
– Production Demo’s
– Solution Proposal & Technical Check

– Off load
– Fully utilize demonstration capacity
– Avoid bad multitasking

– DBR concept

– Add resources if necessary
25



TOC in The Cash Machine
– Needs assessment I and II

– Fully utilize assessment capacity
– Avoid bad multitasking

– DBR concept

– Add resources if necessary
26


Multitasking (or truly BMT - Bad Multitasking)
3 TASKS: A, B, C – each 30 days; one single resource
A

B

75 days

C

83 days
90 days

A B C A B C A B
A B C
A B C A B C A B C A B C

27


time

Amazing!!!
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!!!
28


Focus!!!
Don’t do it:
A B C A B C A B
A B C
A B C A B C A B C A B C
time

Best case scenario:
B

A

C
time

Real-life scenario:
A

A

75 days

40 days

B

B

105 days

C
time

* Sales-support functions must be focused on assisting a well-defined
and limited amount of sales opportunities.
** Resource buffers are strongly recommended.
29 © 2013 Goldratt Institute (Israel)

End-of-the-quarter syndrome:
• 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
30
the quarter?

The core reasons for the
end-of-the-quarter sales 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
31


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
Our FOCUS:

• All salesmen incentive plans are quarterly based
• The backlog of orders is not increasing
• There is no clear definition of delivery times
32


Sales incentive plans – current:
• 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…
33


Sales incentive plans – TOC:
• “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

34

– 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.

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

Key parameters
input to output:
- Ratio
- Time

Closed
Orders
35


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

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

Cash or
Sold finished-goods
36


Lets us understand the 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

5. Presentation demo
6. Solution proposal/technical check
7. Production demo

8. Quotation submission
9. Negotiation
37

10. Closing


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
38

FINANCE

Cash collection


About the approval cycles:
B

A
Run an efficient
Sales operation

D

Make sure
unnecessary
expenses are blocked
as soon as possible

Introduce
In-Process
cost-control steps


D’

Make sure
operations are
not delayed by
unnecessary activities

39

C

Prevent the
introduction of
In-Process
cost-control steps

The link between new product
introduction and cash generation:

A
Maximize the
business potential
of new products

40


B
Beat competition and
overcome losses due
to early phase-out
of older products

D
Launch new
products as early
as possible

C
Ensure full product
functionality prior
to full customer
availability

D’
Launch new
products only
after all customer
tests are successful

Some lessons learned and their
analogy in Sales Management:
Qualified Prospects

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

Cash or
Sold finished-goods
41


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”

42

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.”
43


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.”
44

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
45
have resources to install them” © 2013 Goldratt Institute (Israel)

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

So what’s our main problem?
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!

47

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!

48


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.
49

Place for your photo

Question Mark Ltd.
2 Hadar Street
Herzliya 46290
ISRAEL
Tel: +972-9-950-7464
Fax: +972-9-950-7463
E-mail: toc-israel@012.net.il


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.

50

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