Monday, September 21, 2009

Quality, Cost and Service

Quality, Cost and Service

During this economic recession, it seems that the emphasis at most trucking companies has been placed almost exclusively on cutting costs and providing lower pricing to customers. Necessity has forced most companies to concentrate on cost cutting and lowering pricing. However, when we emerge from this recession the carriers that provide the highest level of quality and service will still be the winners in the long run. Smart companies will only make cuts that don’t damage their ability to provide quality and service to their customers.

The three critical success factors are service, quality and cost. We have some degree of control over all three of them, but have the most control over the way we treat our customers. This is an element of the service factor. In trucking, it is at least as important as product quality (good transit time, low claims ratio, etc.,) and low cost. It is hard to say which of the three critical factors are the most important, but we can always control how we treat our customers, even when costs and quality aren’t meeting our standards.

Quality exists when a product or service meets customer expectations, at the minimum. It increases as customer satisfaction increases. In order to retain existing customers and attract new customers, an organization must produce high-quality products and/or services. If quality is poor, a company must identify the problems and bottlenecks, redesign their products/services, or lose customers by allowing their products/services to be sold as less than acceptable. Therefore, when quality is poor, costs increase and customers are lost. Talking about quality is common in most firms and a great deal of time is devoted to quality discussions at meetings. However, unless concrete steps are taken to improve quality, it will not improve.

The traditional view assumes that improving quality always trades off against lowering costs and that costs will increase with attempts at quality improvements. The quality-based view believes that firms should always try to improve quality and that higher quality products/services pay back the costs required to get them. Improving quality may initially increase costs, but the quality improvements reduce costs in the long run.

The cost of lost customers cannot be exactly calculated. The lost revenue from each lost customer can be approximated, as well as the costs associated with securing new customers. However, the damage to a company’s reputation cannot be easily approximated. Once a reputation is damaged, it is very difficult to repair the damage, even if quality is improved. Companies with bad reputations must offer lower prices to sell their products than do companies with better reputations. Delivering products and services that meet or exceed customer expectations is essential for the survival of a firm today. In the long run, quality improvements pay for themselves.

Prevention costs are incurred in order to prevent defects. Appraisal costs are incurred in order to detect defects in the services already provided. Internal failure costs are incurred when a company detects defects before delivery to the customer and external failure costs are incurred when defects are detected after delivery to the customer (damages, shortages, etc.,). External failure costs are the most costly, as they may result in lost business and damage to the company’s reputation. If defects are detected and eliminated (or mitigated by good customer service) before getting to the customer, the loss of future revenue that is prevented outweighs the costs involved in the prevention and detection of defects.

We’ve all heard it said that quality is not free. You must first pay to improve quality. However, it pays a firm back in the long-run to improve quality through the retention of existing customers and improved reputation, which leads to new customers and revenue. Monitoring variations in quality provides warning signals to help managers distinguish between random variations and variations that should be investigated. Any deviation from specified levels of performance that exceeds what is deemed statistically significant can be investigated and improved. Managers can work to first control the most out-of-control processes. The effects are identified and then causes are identified for the effects. After the cause of the variation has been determined, corrective measures can be attempted.

The need to reduce the amount of time between when a customer places an order to when they receive it is an example of the importance of time in today’s business environment. Trucking companies play an integral part in reducing cycle time and inventory carrying costs for their customers. Processes must work correctly every time. Potential problems must be anticipated and corrected before shipments are tendered, if possible. Consistency is also important.

The balanced scorecard reports a group of performance measures that monitor both financial and non-financial performance. Changes in the non-financial measures are likely indicators of changes in financial performance. So, with balanced scorecard performance measurement, the performance measures should bear a cause-and-effect relation to each other. Improvement of one performance measure should lead to (or be accompanied by) the other performance measures. If employees see that management is measuring an item, they will likely focus on that item, if they have some control over it.

It is hard to say which of the three critical factors are the most important; quality, service, or low cost. Trucking firms should continuously try to improve all three. Higher quality products/services pay back the costs required to get them. Improving quality may initially increase costs, but the quality improvements reduce costs in the long run. Cost cutting is necessary and healthy, as long as you’re not cutting too deeply. However, price slashing will not help your company to grow in the long run. Finally, we can always control customer service (how we treat our customers), even when costs and quality aren’t meeting our standards.

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