Cost of business lost / opportunity lost? How to address?

sowmya

Involved - Posts
#1
Recently we have finished our Annual review. during COPQ review, our business development raised a querry on adding cost of business lost / opportunity lost in to COPQ. eventhough the point is right, how to add that as a quantifiable metric in COPQ.

my proposal is, we can have that as a separate metric "cost of business lost / opportunity lost due to poor performance". we can codify the contributing factors like quality, delivery, cost, response time for analysis.

can anybody review and advise on this?

Thanks in advance.
Sowmya:thanx:
 
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Steve Prevette

Deming Disciple
Staff member
Super Moderator
#2
Dr. Russell Ackoff wrote quite a bit about "acts of commission" vs "acts of ommission". Basically a loss due to a committed act does show up in the "Bottom Line", but failure to do something does not.

He touched upon an idea for measuring this. You would have to keep a log of decisions made by the management of the company, and alternatives that were considered but not acted upon. Then you'd have to run a scenario at the end of the year (or maybe several years) that would tally up the dollar value of the various options considered (and the ones chosen) and see (of course this is now with 20-20 hindsight) how well the chosen items did against the best combination of alternatives.

For example, Kodak had an opportunity to buy Xerox in the 1950's but did not. How much money through today would Kodak have made if it owned Xerox, and Xerox did as good as it did? Often times you here people say - if you'd bought this stock 20 years ago, you'd now have this much money.
 

Jen Kirley

Quality and Auditing Expert
Staff member
Admin
#3
It is an excellent idea to try to capture this metric. A corporation did a study several years back, I think it was Coca-Cola, that concluded that for every dollar spent getting a customer for the first time, getting back a customer who's decided to purchase elsewhere costed $7.

The Post Attachments List - see the green button in the header - has some quality cost calculators that could be used to add up the activity costs involved with trying to get a customer back. But if you want a simple measurement and you already know your present profit margin, you could simply multiply that by the number of lost sales.

The harder thing is finding out how many of what types of sales were lost due to poor quality. How can you tell?
 
M

Murphys Law

#4
I don't know how you'd do this apart from having your sales team analyse all lost RFQs for reasons why you didn't get business. (I knew of one group that tracked all RQFs for % that they won and then explained reason why they lost. I'd bet price wins out most of the time.)

Internal COPQ measurements do not necessarily mean lost business. however, one easy measurement maybe # of 'new business hold's but I don't know it's applicability to your business. In my world, our customers need us but if we are not performing, they formally put us on NBH as a stick to force improvement.
 

Wes Bucey

Quite Involved in Discussions
#5
A slight problem with this method is the customer may never disclose the real reason he chose another or even if the RFQ was bona fide rather than "just keeping my current supplier honest."
 
S

Sequence_Barry

#6
The one method that we have seen quantified by some of our customers is related only to the internal cost of rework / scrap and requires some assumptions / metrics regarding productivity. Suppose that over the course of the year, your organization spent 100 hours reworking incorrect product (product that was caught before going to a customer). How much additional product could you have made (assuming that you can sell everything you make) had you not been required to re-work the incorrect component. This type of analysis is extremely important in periods of constrained capacity (semiconductor industry during initial sales of new chips for example) when you can demand a premium price for a new product, but yield is very low. Unless you have some method of making additional product simply appear ;) you will never recognize these lost profits / sales.
 

sowmya

Involved - Posts
#7
All,
thank you very much for your thoughts. it is quiet difficult to measure and quantify.
Thanks Steve Prevette. what ever you have quoted is correct. Normally errors of commision are not leading to loss of business. but errors of omission do contributes. i have browsed the internet and got A LITTLE BOOK OF
f-LAWS. Is it the book you are mentioning?. can you pl. elaborate more on measuring that?

Thanks jennifer. as you have said, the profit margin in to lost sales is an approximate loss.

but how can we calculate the following scenario. One existing customer is not satisfied with the existing business. so he has not given further business and decided to go with some other supplier. but existing business is not taken back. As Wes bucey told, customer may not disclose the real reason.
 

Attachments

Wes Bucey

Quite Involved in Discussions
#8
<snip>

but how can we calculate the following scenario. One existing customer is not satisfied with the existing business. so he has not given further business and decided to go with some other supplier. but existing business is not taken back. As Wes bucey told, customer may not disclose the real reason.
One reason customers don't cancel existing contracts when they have indicated no new business will be forthcoming is that the economics of hassling over the cancellation of an existing contract is more expensive and damaging to the business than "toughing it out" until the existing contract is fulfilled.

Did your top execs want this customer's business badly enough to make an effort to retain it? Most customers think this way:
If this supplier is not making a substantial effort to keep my business, it says to me he doesn't want my business. Since that's the case, why try to change his mind? There are other suppliers who WANT my business.

Top executives at suppliers have a duty to themselves, their investors, and their employees to keep profitable business coming in. Most supplier executives have good, valid reasons when they decide not to pursue more business from a customer. Those reasons may range from profit margins to hassles in getting paid on time or other reasons which don't necessarily filter down to the lower level employees. My organization was rare in conveying such information and reasoning throughout our organization; most keep lower level employees in the dark.

On rare occasions, supplier executives are either clueless or just plain jerks in dealing with customers and that ignorance prevents them from making a coordinated effort to keep profitable business and shed unprofitable business.
 

Steve Prevette

Deming Disciple
Staff member
Super Moderator
#9
All,
thank you very much for your thoughts. it is quiet difficult to measure and quantify.
Thanks Steve Prevette. what ever you have quoted is correct. Normally errors of commision are not leading to loss of business. but errors of omission do contributes. i have browsed the internet and got A LITTLE BOOK OF
f-LAWS. Is it the book you are mentioning?. can you pl. elaborate more on measuring that?

Thanks jennifer. as you have said, the profit margin in to lost sales is an approximate loss.

but how can we calculate the following scenario. One existing customer is not satisfied with the existing business. so he has not given further business and decided to go with some other supplier. but existing business is not taken back. As Wes bucey told, customer may not disclose the real reason.
A LITTLE BOOK OF f-LAWS is indeed one of Russ Ackoff's more interesting books. The published book "Ackoff's Best" has a good collection of his articles. In Chapter 4 of his book "IDEALIZED DESIGN" he speaks of acts of comission and omission. He does state on page 77

It is difficult to identify errors of omission because accounting systems identify only errors of comission. Therefore, in organizations that treat mistakes as bad and punishable, the best way to maximize job security is to do nothing

Ackoff then discusses a management information system that should remember management decisions that were made (a "decision record"), measure errors from commission and ommision, and work to learn from these errors and improve.

In your example, you can still measure the dollar cost of the lost business from the customer. Next would come trying to decide why the customer left, and what you can learn from it. There may have been indicators while they were a customer of their displeasure, and if you know what competitor they went to, you may be able to compare yourself to them.
 

kgott

Quite Involved in Discussions
#10
A couple of jobs ago I worked for a supplier who made transportable accommodation for mining camps. While there I learned that the customer base had something of an unwritten policy of sharing the work around various suppliers so as to keep them all in business so that competition between them all was maintained.

How would a variable such as this be factored in to the calculations for a KPI?
 
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