The original text of this article was first published by me in 1996 as an academic article and is available on my LinkedIn profile, the themes remain as important now as then.
According to Terry Hill, professor at the London Business School, Manufacturing’s’ strategic task is to provide, better than the manufacturing functions of competitors, those criteria which enable the products involved to win orders in the market place. But, what do we mean by “win orders”?
It is necessary here to define the difference between order winners and order qualifiers. In most markets it is necessary for a business to achieve certain criteria to even be considered as a possible supplier. Furthermore, they will need to retain the criteria to remain a competitor in the market. However, providing or attaining these criteria does not alone win orders. Order winners are those criteria which, assuming all competitors have qualified, actually result in a won order.
With order qualifiers, companies need only to be as good as their competitors, with order winners they need to be better than those competitors.
For instance, to distinguish between order qualifiers and winners, when Japanese companies entered the UK colour television market they changed the way in which products won orders from predominantly price to product quality and reliability in service (and here you could just as easily insert motorcycles, cars and almost any other product category). The relatively low product quality and reliability in service of the existing products meant that existing producers were losing orders to the Japanese companies, i.e. existing manufacturers were not providing the criteria which qualified them to be in the market.
Some time later, largely through the efforts of various quality programmes, product quality was raised by those concerned so that they again qualified to be in the market. As a result the most important order winning criterion reverted to price – over the years we see this theme of quality, price, quality, price repeat itself.
Manufacturing must therefore provide the qualifying criteria in order to get into or remain in a given market, be that quality, cost or lead time, but this alone will not win orders, they merely prevent a company losing existing orders to its competitors. Once the qualifying criteria have been achieved manufacturing must turn its attention to the ways in which orders are won and to provide these better than any of its competitors.
There exists a range of order winners and qualifiers, not all of them supported by manufacturing so they would not all form part of that functions strategic role and it is worth reviewing those manufacturing specific criteria.
Price
In a mid 1990’s study of East Midlands manufacturing organisations the single most important order winning criterion, as considered by their management, was price. In many markets, particularly in the growth, maturity and saturation phases of the product life cycle, price becomes an increasingly important order winning criterion. Where this is the case then the low margins required give manufacturing the task of reducing costs in order to provide the low costs necessary to support the product in a price sensitive market place.
Achieving cost reduction is easy to evaluate but difficult to achieve. In most manufacturing companies direct labour is only a small part of the total cost, materials followed by overheads are usually the two main areas of cost. Many companies do not concentrate their efforts in the area of these, greatest, costs, leading in many instances to most effort being directed towards reducing direct labour cost and, often miscalculated, efforts to drive down the headcount. Focus must be applied to the full “cost of goods sold” category to include the full supply chain costs, product costs introduced by the shadow of design and costs within the supplier base.
Although there is need to improve productivity at all levels, focusing on the area of greatest cost will tend to yield the best results. As materials and overheads account for 85 – 90% of total costs, giving these the attention they deserve makes sense.
Delivery
It is necessary here to clarify the aspect of delivery. Separating the issue of on time as distinct to that of short lead times is an essential part of understanding the market. In some markets delivery on time may only qualify the company to be in the market whereas short lead times may actually win the order. In other markets the reverse may be true.
It is therefore necessary to examine both aspects as attempting to describe both under one word will hide essential insights.
Delivery Reliability
The aspect of delivery reliability concerns the task of supplying the products on the agreed due date. On time delivery is a major concern of the manufacturing function as well as the distribution organisation.
As stated, in many markets, this criterion constitutes a qualifier and, often, an order losingcriterion. If companies persistently miss due dates then customers will increasingly stop considering them as potential suppliers.
For the manufacturing function the aspect of delivery reliability involves considerations of capacity, scheduling and inventory in the form of work in progress and finished goods. Recognition of the increasing need to qualify on this term has prompted efforts by the manufacturing function to reduce the variability involved in the manufacturing process.
While delivery reliability is increasingly an order qualifier for customers operating on very low inventory systems this may still be an order winning criterion where even a very slight irregularity in delivery may cause the customer increased costs or increased delivery times to their customers – this is particularly important for the Automotive industries.
Delivery Speed
In some markets the ability of a company to deliver more quickly than its competitors, or when it is able to meet the delivery date when only some or even none of the competition can do so, can prove to be an order winning criterion.
Products which compete in this way need a manufacturing process that is capable of responding to this requirement. Where process lead time is shorter than the required lead delivery time, but delivery date is still difficult to achieve because of the current order backlog then measures such as short term capacity increases, by overtime working or rescheduling existing jobs, may be necessary.
Where the process lead time is greater than the required delivery time then manufacturing can only meet the customers requirements by increasing short term capacity or by holding completed product inventory in anticipation of winning these types of orders or by effectively reducing the lead time by completing part of the order before the order point. Where process lead time and existing backlog do not exceed the customers delivery requirement then delivery speed can no longer be an order winning criterion.
Through techniques such as Lean lead times have been significantly reduced and the need to shorten them in line with continued perceptions of the market to get a competitive edge remain. In addition companies can hold excess capacity, maintain low/zero order backlogs or hold inventory at any or all stages in the process – but that all adds cost.
Quality
It is important here to separate the word “design” from “quality”. Both are related but whereas the former concerns creating a product specification the latter concerns the task of meeting that specification. Whilst one is a task of the design function the other is the task of the manufacturing function.
Many companies have failed to compete effectively on this dimension. In part this is because the definition of the word has been broadened to encompass many dimensions resulting in a lack of understanding and subsequent lack of direction. I am probably about to bring a world of pain on my shoulders here but, in the context of manufacturing (as opposed to design), the aspect of quality which is most important is that of conformance. In most markets this aspect has been changed from an order winner in to an order qualifier and is becoming more so. In part this has been brought about by Japanese companies who saw the provision of higher quality as a competitive edge over domestic manufacturers in many markets.
The recent attention attracted by quality based approaches in management has further highlighted the emphasis on the competitive advantage of improvements in product quality.
Demand Increases
In some markets a company’s’ ability to respond to increases in demand is an important factor in winning orders. These orders may reflect the high seasonality of customers requirements or be of a spasmodic or one off nature. This factor concerns the level of predictability surrounding demand itself as well as others such as product shelf life and the frequency of product modifications in line with market requirements. All will affect manufacturing in terms of its responses.
Product Range
Markets are increasingly characterised by difference not similarity, however the balance between levels of customisation and the volume base for repetitive manufacturing has to be addressed by bringing together the relevant parts of the organisation to select from alternatives.
Manufacturing’s role is to continue to develop processes and procedures that are flexible in terms of product range difference and also low cost results. Process developments need to reflect the broadening nature of the product base and the lower volume implications that go with it. This is reflected in reduced set-up times to enable companies to cope with the lower volume nature of these changes yet retain the economies of scale associate with higher volumes and this is particularly evident in the Automotive industry where we have seen an explosion in product choice while retaining affordable pricing.
Quantifying Order Winning Criteria
Having identified the order winning criteria pertaining and distinguished them from qualifiers it is then necessary to distinguish between the importance of each criterion.
Hill’s approach to quantifying order winning criterion is as follows.
Firstly identify all the products that are offered by the company. In most cases this is simply the “made in” parts from the price list. If the firm makes to order rather than to stock then representative product types must be chosen. A list of all order winning criteria is drawn up, this list must cover both marketing and manufacturing perspectives. It is tempting for marketing to list everything as an order winning criterion, while we acknowledge that marketing should be the experts at understanding the customers requirements this temptation should be resisted.
Once order winners are agreed then appropriate weightings can be applied in line with their relative importance, this takes the form of points out of 100. It is likely that an initial allocation will exceed 100 points, sufficient iterations will resolve this.
The products are then grouped together by comparable order winning criteria and volumes, similar to groupings when developing a group technology manufacturing system. As markets are dynamic then order winners and their associated weightings will change over time. In order to monitor this change and complete the analysis fully it is necessary to repeat this analysis for several future time periods to reflect the different stages in the product life cycle.
As the product ages in its life cycle initial order winning criteria such as novelty of design reduce in importance compared with (say) price and volume flexibility becoming more important. Manufactured quality may initially be important but can soon become a qualifying criterion rather than an order winning one.
Professor New of the Cranfield Institute uses a similar approach but one in which comparisons with competitors are more easily seen. This is achieved by multiplying the weighting factor by a rating which expresses the performance of the company relative to the competition.
Some order qualifiers have the potential to become order winners. In this way a decision on whether to invest in manufacturing so as to initiate this change can be considered. In a similar way order qualifiers can become order losing sensitive, marketing must identify these as it is important for manufacturing to be fully aware of any qualifying criterion which are directly sensitive in order losing terms.
Performing Excellently on a Range of Order Winning Criteria
Attempting to win on every criterion appears to be the strongest strategy. The problem with this is that it is usually not possible, and even if it were, it would be uneconomic. many order winning criteria are in direct conflict with one another and improving one may deteriorate another.
Being good at everything is not the same as excellence at everything. In practice firms which demand a wide spread of performance criteria do not get them, rather they achieve a level of mediocrity instead of excellence. A major consequence of trying to win on too many aspects is that the available talent becomes spread too thinly. After an initial period management and the workers simply become overwhelmed by the tasks. This is rapidly followed by a decline in performance normally taking the form of cost increases, poorer delivery and deteriorating quality levels.
In only a very few businesses is it necessary to do well on all criteria. It may only be necessary to try to win on certain criteria. Identifying where the competition must be beaten, as opposed to drawing with it is sufficient, is important. Looking at the opposition in these terms can help firm up the ideas of what is desirable and what is necessary and also shows how small, highly focused, firms can offer considerable threats to their larger opponents.
Sometimes the challenge comes the other way around. The threat is from a larger firm which is using its muscle to overpower smaller competitors through features such as standard products, ex-stock delivery and low prices. Facing many simultaneous challenges would be unusual, however, considering its possible impact might help to overcome the idea that trying to do everything is automatically the right approach.
Michael Akers is a Partner at Advanced Analytics Solutions LLP.