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A new discussion on market share

Al Wiley, an executive of Xpectmor, sent us a comment on our recent Market Share post. He says that “market share is the definitive measure of customer satisfaction.” Of course he is right. The measure of market share, however,  is what causes the dilemma for many of us.

In the equipment market it is reasonably easy to define market share. There are a finite number of transactions and everyone knows what everyone got. For instance, we have five different suppliers in the market with sales last month. Supplier #1 got 4 sales, supplier #2 got 1 sale, supplier #3got 2 sales, supplier #4 got 2 sales and supplier #5 got 1 sale. The market share is a simple matter of arithmetic. Supplier #1 got 40% market share and so on.

With the parts and service business it gets more complicated. The various suppliers into the market don’t know what the other suppliers sold during any particular period. So how can we possibly calculate the market share of any particular supplier? That is why there has not been any real definitive publication for market share.

When I first started in the Industry in the late 1960’s some suppliers used to conduct a personal survey with each and every one of their customers worldwide. Can you imagine the time and cost for such a survey? Well they did them and they published the results within their distribution network. It was not precisely accurate but it was a very good indicator of where you stood as a dealer in parts and service market share.

As more and more machines get GPS equipped and the dealers/distributors, manufacturers and customers become more adept at understanding telematics and their use we have a terrific opportunity. We can calculate what the consumption of parts and service “should” be on a machine.

This is the first problem. The customer doesn’t always follow the recommendations of the manufacturer of the machine for the maintenance intervals nor the maintenance items to be dealt with for a particular service. Similarly when it is obvious that a repair should be made with a “new component” sometimes a repair that I call “bubble gum and band aids” will be performed. You might be wondering why this is important. Well it is due to the fact that all we can do is calculate the “potential” consumption of parts and service for a particular machine in a specific application running a specific number of hours. It is this potential that we have to use to calculate our “market capture” rate. See now we change the word. It is no longer market share it is market capture.

The dealer captures the potential business based on their actual sales of parts and service. Once we have these facts nad have them for a sufficient period of time we can make a clear statement about capture rates are the success and/or failure of the particular strategy that a dealer is following. The time is now.
 

 

 

 

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Economic Order Quantity

The blog on variable lead times for each part number seems to have struck a chord so with that in mind I thought it appropriate to kick over another sacred cow in parts inventory management –  The Economic Order Quantity.

The EOQ has been around since 1905 when Mr. Kerr and Mr. Norton developed the formula to balance the cost of placing an order with the cost of carrying inventory. A worthwhile effort and one that worked for a long time based on the constraints of the day.

Several things have changed in the intervening 100 plus years that have rendered the traditional EOQ to be a significantly less value. Daily stock orders with turnarounds of three to five days have clearly changed things to the degree that the EOQ should be reevaluated. The dramatic reduction in the cost of computing powers, storage media and business software have also provided a reason to reexamine the logic of the cost of placing an order.

The formula for the EOQ is as follows:

EOQ = the square root of 2 times   AD/LC

The variables in the formula are:-

  •  The A = Order Cost
  • The D = Annual Demand
  • The L = Product Cost
  • The C = Carrying Charge

If we look more closely at the Order Cost we will see that there are several items to consider.

  • a) Order Generation
  • b) Order Preparation and Record Keeping
  • c) Order Placement
  • d) Receiving
  •       I) Physical
  • ii) Clerical
  • e) Accounts Payable

This cost is per part number so as you go through the calculations you will find the answer tends to zero. And from your earlier arithmetic experiences the square root of a division calculation that has a numerator of zero is also zero. So this pillar of the inventory control world EOQ should be revisited and a new determination made as to the variables and how to handle the determination of the Order Quantity. The time is now.

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Customer Retention

In the 1990’s, three professors, Sasser, Hesketh and Schlesinger from Harvard Business School wrote a book called “The Service Profit Chain.” It was for me the definitive book on customer retention.

They posited that in the Industrial Distribution world if you increased customer retention by 5% you would increase the profitability of the business by 45%. That is very impressive.

With that said everyone in America should be trying to increase customer retention. In fact the Japanese taught us that with their – Customers for Life philosophy. Carl Sewell the renowned “automotive dealer” in Dallas, TX wrote a famous book with a Yale co-author called Customers for Life which still holds a lot of sway in the customer service world, and rightfully so.

The trick is it isn’t that easy to increase customer retention. We should be using the traditional tools of an “exit” interview as we do with employees. Talk to customers who have defected from you and find out where they went and what they like about that supplier. That will tell you what you need to do. Don’t ask them what you did wrong they will never tell you. Ask them what they like about doing business with the new supplier and they will gladly tell you that.

One last hint – don’t start asking questions like this unless you intend to start changing things. Better not to raise expectations that you have no intention of meeting. The time is now.

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Market Share

If you had to choose between customer satisfaction and profitability, what would be your choice? I would take customer satisfaction as without satisfied customers the ability to make profit is going to have a short life.

 

How to measure customer satisfaction becomes the challenge. Some people define it as repeat business; others measure the change in sales from one period to another; still others use surveys. What is your choice? How satisfied are your customers? One of my favorite indicators of customer satisfaction is the market capture rate. How much of the parts and service business that is available do you in fact receive on the machines that you sell and service? What is your parts market capture rate? What is your service market capture rate? I will put parts at around 35% – 40% and service in the range of 15% – 25%, which by nearly any measure is not very good. The interesting thing about the parts and service business is that management has been held harmless as there is no precise authoritative measurement by which this is reported. It is an opinion. That means that we don’t have a high standard of market capture rate against which we are measuring the performance of the parts and service departments. That is about to change. With the advent of machine telematics some years ago we can now track the hours of each machine and start to evaluate parts and service consumption rates across machine models and applications. This will be a great advance as we will finally know on which machines we are losing the product support business and on which type of products and services. This will be a tremendous change and opportunity for everyone in the parts and service business. I look forward to his type of challenge, shouldn’t you? The time is now.

 

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Rant of the Day

It is interesting watching two grown men argue about higher education. Santorum has called Obama a snob as he said that he wanted everyone to have a four year college education. The Obama backing off and saying he wanted more than just high school highlights a serious subject to consider. What should you do after high school?

I was with a client last fall and the room had about eight people. Three had Doctorates and four had Masters Degrees. I was the only person in the room without a degree, although I did have four years University training. I was wondering with all the educated people how were the “non-educated” going to make out. The problem today is that for many bachelor level degrees the level of Actual knowledge is not far above that which a high school leaving delivered several decades ago.

I keep watching the debates about education. We need smaller class sizes or higher teacher salaries. Several years ago I was asked to look at a project for the Los Angeles Unified School District. I think this is still one of the largest districts in the country. They asked me to look at their mobile equipment, school buses and the like, for maintenance and repairs. I asked to see the inventory list. They said they didn’t have one. Perhaps that is the first indication of some the problems in education. How is it being run? Well the first obvious area to look is at the school board level. Now you have to remember I am biased. I am a teacher.  But one of the first places I would look is the school boards – or more importantly all positions in education that are not in the classroom. The ratio is all upside down. We have too many people doing things that are not in the classroom and not enough in the classroom. But that is the result of the political position for education. Everyone wants a job but not enough know what to do.

Which brings me back to the current debate university or everything else?

Look at the cost of a four year “College” education and compare that to the earnings of four more years of a work life. Today there is almost a $500,000 difference. At university faculties we are starting to have more vigorous debates about the value of the junior colleges and trade schools. The American public has been conditioned over the past four or five decades to want to have a degree for their children. Consider that an article in a recent Forbes magazine noted that 15% of parking lot attendants have a college degree. I don’t think that was what was intended with the push of parents to have their children have a degree.

Today there is what is called a “skills” gap. We have lots of job openings which for one reason or another go unfilled.

There is a huge need for technicians in America. Where are we going to get them?

This is a problem that won’t go away. In the 1900’s the under educated could pursue a worthwhile career and life in agriculture. In the 1950’s that became the production line. What is the prospect today for the under educated? We need to get our arms around this problem and start to fix it or ewe truly will have a lost generation… or two. The time is now.

 

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Selling Skills

Preparation is one of the keys to good selling skills. Of course that is common sense for most or at least it should be if you want to succeed at selling.

Imagine not know the customer? Not knowing what they want and need. What they own and how to make their operations more effective. The job is to reduce owning and operating costs while at the same time protecting the residual value of the capital good. This applies to everything – cars, boats, ovens and equipment.

Knowing who the customer is; their buying habits, personal attributes, their needs and wants, the relationship that they have with your company. These are critical factors. You should also know that they don’t purchase everything from you yet be sincerely interested in where they do buy if not from you and why. This is when you can bring your specialized selling skills to the interaction. Find out what it is they particularly like about that supplier and you will know what you have to do. Bring on the features and benefits and the value proposition. It is pretty simple if you pay attention and do your homework. The time is now…..

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Lead Times in Inventory Management

With JIT (Just in Time) supply chains we really have come to a point where customer service is in jeopardy. The problem is our cavalier approach to the lead time component of order points.

The lead time is the total elapsed time between when a part reaches the order point in the warehouse location and on the computer and when the warehouse location and the computer system have been updated with the receipt. This time is broken down into several component parts.

  1. Order Lag Time
  2. Order Review Time
  3. Placing the Order
  4. Supplier Processing Time
  5. Shipping and Transportation Time
  6. Physical Receiving Time
  7. Record Updating Time

Each of these elements has a discrete time consumed in their execution. Yet even with good information on each of these elements we still have a problem with the lead time.

We use ONLY one lead time for each vendor in our business systems. You might be saying to yourself “so what.” Well we can have parts that are regularly available and have a stock replenishment time that is consistently within a week. At the same time we will have parts that are in short supply, for whatever reason, and the replenishment time can be a month or two. With only one lead time per vendor we will either have too much of the readily available parts or too little of the parts that have supply irregularities. There is, however, a simple solution.

Calculate the lead time for each and every part not just for the vendor. This means that you will match the supply chain performance with your performance and can accommodate variations of delivery so that you can supply good availability to your customers. Think about it.

There have been substantial changes in inventory management software and tools yet we have lagged behind with this one simple item. Calculate the lead time for EACH part and not just for each vendor. You will be pleasantly surprised by the results. The time is now…

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Service Technicians

The complaints are still out there- “I can’t find any experienced equipment technicians.” Isn’t it obvious by now that anyone worth anything that has experience is going to be working already? If there is a technician available and they apply for work I am sure that you will give them a very thorough interview and background check.

We need to develop our own technicians. As obvious as that seems to be we continue to be in denial.

Hire willing young men and women (yes women) who have a mechanical aptitude and get them into a development program. Start as we did in the old days with one “help/trainee” for every two technicians. Set up a training program. Work with local technical schools and unions and customers who offer technical training. Establish a “career path” training program. It will take roughly three years to create a market ready technician.

There are wonderful programs at Oklahoma State University in Okmulgee for one which works with dealers and manufacturers to offer specific brand training programs. Caterpillar, John Deere, Toyota and Ditch Witch to name a few work with schools around the country on these programs. Check out your local area to find the schools that you can partner with in this area.

Caring about your employees, providing training and a safety aware work place will go a long way to retaining your employees. Some dealers, and extremely success dealers, have never had a layoff of technical employees. Imagine what that says to the employee.

The time to complain has long since passed – don’t you think we should start developing our own? The time is now…..

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Can we make a difference

The transition to team management while still encouraging curiosity is struggling as management doesn’t know how to encourage risk taking without contradicting the work of the team.

The story of the ages is that people will take risks when they have less to lose and be risk averse when they have a lot to lose. How to break through this paradigm will be a challenge.

To lower parts inventories while improving customer availability.

To guarantee completion dates on repairs while embracing employee satisfaction.

To retain customers while payment patterns change.

All of these challenges exist because we have been rather timid over the past years to tackle changes necessary in a meaningful manner. Now is the time.

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Are employees looking around today?

December was the first month in many years that had more people quitting their jobs than being laid off or fired. Is this the beginning of musical chairs with employees? Is the labor market now strong enough to absorb all the employees that feel they were hard done by over the past three or four years by their employers?

What should employers do to keep their employees satisfied and happy and stimulated in their work to retain them as employees?