Lost Order Analysis: Critical for Long-Term Growth
By MIKE COLLINS, President, MPC Management
Finding out why current and potential customers fail to give you a particular order is critical. Without this information, you wouldn’t know how to prevent future lost orders, and you would have trouble retaining good customers. In other words, it’s difficult to know what to do to prevent future lost orders or lost customers if you don't know why you are currently losing them.
Perhaps 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 a fundamental plank in the foundation of continuous improvement, customer satisfaction and quality programs.
In fact, 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.
It would seem that 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. Customers quit buying or change to a competitor for a wide variety of reasons 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 customers perceive 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 even market trends.
The problem seems fairly simple. If you are losing orders to competitors, then obviously the customer is not 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 are unaware of all the reasons why customers drop them as a supplier. So, if lost orders are that important, why don't more people seek out their underlying causes?
This is a very good question with multiple answers. First and foremost, 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, as its human nature not to dwell on bad news.
But the most important reason lost order analysis doesn't happen is because management doesn't demand the information or make it a high priority. And 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. In fact, 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 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 & 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:
- The first step is to compile a list of all the quotations by sales territory or salesperson.
- The printout of the list should describe each quoted project with one quotation per page. This page is called a status sheet.
- Under the description of the quotation,each status sheet page should include four alternatives for the sales representative to check:
- Project is active ___ percent.
- Project is dead.
- Project is shelved.
- Project is lost to competitor.
- If the project is checked as active, the salesperson must answer the percentage chance of getting an order. All quotes that have an 85 percent or higher chance of becoming an order are then used in the sales forecast.
- If the project is marked dead, the file is pulled from the active quote files.
- If the project is marked shelved, the quotation is left in the active files and reviewed again in the next six-month review.
- If the project is 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.
There are eight kinds of information you can gather from quotation and lost order analysis that will help you in 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 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 When I say strategies, I mean pricing, current products, new products, services, sales department, sales channels, and advertising and promotion.
3. Retaining the best customers: MVCs, otherwise known as "most valuable customers," 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 your 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 no matter how long it takes.
4. Sales representative information: By evaluating bookings to lost orders, it's easy to see which representative 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: Most importantly, 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 the three competitor products. I mean an apples-to-apples comparison in a spreadsheet that compares every feature of the product included in the sell price.
7. Hit rate: The last part of the quotation analysis is the “hit rate,” which 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, then it means that $225,000 was spent on unsuccessful quoting.
There is a section in my “Growth Planning Handbook for Small and Midsize Manufacturers” that explains this process in great detail with charts and examples. If you want a copy of this section, please e-mail me at firstname.lastname@example.org.
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.
Michael P. Collins is the author of the book, Saving American Manufacturing. You can find related articles on his website at www.mpcmgt.com.