By Mike Collins, Author, Saving American Manufacturing
Finding out why current and potential customers fail to give you a particular order is critical, because without this information, you wouldn’t know how to prevent future lost orders, and you would have trouble retaining good customers.
The most important use of lost order analysis is to provide the ultimate validation of quality programs. This is particularly true when it comes to product or service deficiencies. Keeping track of lost order information is critical to perpetuate long-term growth, and is important for continuous improvement, customer satisfaction, and quality programs.
I have always wondered why proponents of continuous improvement, or ISO 9000, did not include lost order analysis as one of their standards. If the customers keep buying from competitors, and the manufacturer keeps losing orders, then quality improvement may not be working or it may not be as important as other competitive factors in getting new orders.
One of the simplest ways of evaluating whether a continuous improvement or ISO 9000 program is really working or worth the cost, is to find out if customers are defecting and why.
There are various reasons why customers quit buying or change to a competitor; including, after sales services and their perception of continuous support. Just shipping a high-quality product may not be enough, and a commitment to continuous improvement should include a systematic way of monitoring customers and following up on lost orders.
When you lose an order it is usually because a customer perceives the competitor product or service as a better solution. If you don’t know why they selected the competitor then you won’t be able to modify your product, improve quality problems, and offer a new product or a new service to compete.
Lost order analysis can give you specific information on pricing, service problems, competitor strategies, and market trends. The problem seems fairly simple. If you are losing orders to competitors, then the customer must not be satisfied with your offer, and continuous improvement is not working. So why don’t the promoters of continuous improvement, ISO9000, TQM, lean manufacturing, and similar programs investigate the heart of the issue: losing orders and customers?
Despite its importance, lost order analysis is a customer tool that is seldom used, particularly by manufacturers who are shotgun marketers and do not have a marketing or business plan. My own surveys and interviews over the last several decades indicate more than 75 percent of small manufacturers do not track lost orders, while 50 percent were unaware of all the reasons why customers drop them as a supplier. If lost orders are that important, why don't more people seek out their underlying causes?
This question has multiple answers. First, salespeople don't like to pursue the reasons why they lose orders out of fear those reasons will be held against them. Second, salespeople are so busy trying to get new orders they don't make time to follow lost ones. Third, it's sometimes difficult to get customers to tell you why they gave the order to your competitors. Finally, lost order analysis doesn't happen because management doesn't demand the information or make it a high priority. Many companies simply depend on their sales department for this information and have never developed a systematic way to dig out the real reasons.
What good will it do to invest money in advertising, hire new sales people, or develop new products if you don’t know why the customers don’t buy the current products? Why adopt a lean manufacturing program, install a new MRP system, or invest in any other efficiency system if you can’t count on the customers buying your products in the future?
You might have the most cost efficient processes, highly trained employees, and high-quality products, but this becomes academic when customers purchase the competitors products instead of yours. The bottom line is in order to grow you must count on most of your good customers to continuously buy from you. If they don’t you must find out why.
Quotation and Lost Order Analysis
A simple way to find out about lost orders and active projects is to periodically analyze your quotation or bids. The following describes a method I used for many years as a general manager of a machinery division:
- Compile a list of all the quotations by sales territory or salesman.
- Printout a status sheet that describes each quoted project with one quotation per page.
- Check alternatives under the description of the quotation:
Project is active _______%.
Project is dead.
Project is shelved.
Project is lost to competitor.
- For active projects, the salesman must answer the percentage chance of getting an order.
- For dead projects, the file is pulled from the active quote files.
- For shelved projects, the quotation is left in the active files and reviewed again in the next six-month review.
- For projects lost to a competitor, the sales representative is asked to find out the specific competitor, model, competitor sell price, and reasons you lost the order. If the answers are inadequate, the customer should be called by the factory.
Eight kinds of information gathered from quotation and lost order analysis can help making strategy decisions:
1. Competitor sell prices — The competitor pricing information is used in “Competitive Price Comparisons” to guide you in new product design, price discounts as a tactic, and making decisions about yearly price list changes.
2. Changing strategies — If you can uncover the real or complete reason why the customer decided to buy a competitor's product, you will have insight into what strategy must be changed in the future to get the customer back or get the next order. Retaining good customers is just as important to a growth plan as finding new customers and new orders Strategies include pricing, current products, new products, services, sales department, sales channels, and advertising and promotion.
3. Retaining the best customers — "Most valuable customers," (MVC) are the small number of customers who make up most of a manufacturer's sales volume. Losing the sales volume from an MVC accounting for 40 percent of business can obviously kill off growth for a long time. If these MVCs are profitable, you must find ways to retain them. If you do lose an order on an MVC account, you need to call them and pursue the reason for the lost order.
4. Sales rep information — By evaluating bookings to lost orders, it's easy to see which rep groups (or sales territories) are having trouble selling your product lines. Changes may have to be made to the sales channels to achieve your growth objectives.
5. Model information — Grouping lost orders by model reveals which models (or product lines) might not have a competitive advantage and should be considered for redesign or a pruning decision. If you discover the customer perceives your competitor's product to be superior, you may have to redesign the product or develop a completely new one to compete.
6. Competitive information — It is necessary to find out exactly which competitors you are losing to most of the time. For instance, if you have 25 competitors but are predominantly losing orders to three of them, it makes sense to focus a lot of attention on these three competitors. At a minimum you should do a competitor matrix for each of your models against the equivalent model of each of three competitor products.
7. Hit rate — The hit rate is the percentage of quotations won (orders) to total quotes issued. This is important for several reasons. First of all, it is a good indication of the effectiveness of the sales department. Secondly, if the hit rate drops to a low percentage, it should flag management to investigate why the company is losing or not closing orders.
8. The cost of quotations — The last point associated with the hit rate is the overall cost of unsuccessful quotations. It is relatively easy to examine the total costs of the estimating or inside sales department and develop an “average cost per quotation”. For instance, if the estimating department does 500 quotations per year (which cost approximately $250,000 or $500 per quote) and the success rate is 10 percent per year or 50 successful quotes lead to orders – it means that $225,000 was spent on unsuccessful quoting.
There is a section in my Handbook “Growth Planning Handbook for Small and Midsize Manufacturers” that explains this process in great detail with charts and examples. If anybody wants a copy of this section please email me at email@example.com
Remember, you can't really develop a plan to increase sales growth without knowing why you lose orders and customers. It's no exaggeration to say your very survival in the new economy depends on it.
Mike Collins is the author of Saving American Manufacturing. His website is www.mpcmgt.com.