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QUESTION 3 Failure costs are divided into internal and external failure cost categories. Briefly explain on that statement and give relevant examples related to the failure cost and how it can be rectified in view of future prosperity of an organization. (5 marks) "The cost of quality." It’s a term that's widely used – and widely misunderstood. The "cost of quality" isn't the price of creating a quality product or service. It's the cost of NOT creating a quality product or service. Every time work is redone, the cost of quality increases. Obvious examples include:
• • • • •

The reworking of a manufactured item. The retesting of an assembly. The rebuilding of a tool. The correction of a bank statement. The reworking of a service, such as the reprocessing of a loan operation or the replacement of a food order in a restaurant.

In short, any cost that would not have been expended if quality were perfect contributes to the cost of quality. Total Quality Costs As the figure below shows, quality costs are the total of the cost incurred by:

Appraising a product or service for conformance to requirements. These include the costs of: • • Incoming and source inspection/test of purchased material In-process and final inspection/test . Failing to meet requirements.• • • Investing in the prevention of nonconformance to requirements. Quality Costs—general description Prevention Costs The costs of all activities specifically designed to prevent poor quality in products or services. Examples are the costs of: • • • • • • • New product review Quality planning Supplier capability surveys Process capability evaluations Quality improvement team meetings Quality improvement projects Quality education and training Appraisal Costs The costs associated with measuring. evaluating or auditing products or services to assure conformance to quality standards and performance requirements.

Examples are the costs of: • • • • • • Scrap Rework Re-inspection Re-testing Material review Downgrading External Failure Costs Failure costs occurring after delivery or shipment of the product — and during or after furnishing of a service — to the customer.• • • Product. Failure costs are divided into internal and external failure categories. to the customer. Internal Failure Costs Failure costs occurring prior to delivery or shipment of the product. Examples are the costs of: • Processing customer complaints . or the furnishing of a service. process or service audits Calibration of measuring and test equipment Associated supplies and materials Failure Costs The costs resulting from products or services not conforming to requirements or customer/user needs.

Please elaborate on that statement and explain in relation to the impact to the profit making organization if it is not being followed professionally especially if we are not been to improve on our quality product or service seriously. for example. At the same time perceived 'switching barriers'. are being reduced. failure of products or defects in their manufacture. A good illustration of the effect of these changes is in the financial market. in some manufacturing sectors customers may have very little choice over which . where the growth of internet and telephone banking has presented consumers with a breadth of new alternatives at the same time as measures are being taken to ease traditional switching barriers such as the transfer of standing orders and direct debits. the inconveniences of changing supplier. (5 marks) Customers are becoming ever more demanding.• • • Customer returns Warranty claims Product recalls Total Quality Costs: The sum of the above costs. and in most markets they have more options to choose from than ever before. This represents the difference between the actual cost of a product or service and what the reduced cost would be if there were no possibility of substandard service. QUESTION 4 “Customer is always right and customer is the king”. Different markets show very different customer loyalty profiles. The Leadership Factor's experience has shown that.

something which will be covered in more detail later. but they will be vulnerable if any competitor arrives on the scene. Companies that are in a virtual monopoly situation can be vulnerable to this way of thinking. Figure 1 Why does customer loyalty matter? What is meant by customer loyalty? It is a phrase that can be used to embrace a range of customer attitudes and behaviours. This can lead to complacency.the amount of competition.1 shows the relationship between satisfaction and loyalty for one Leadership Factor client. and the feeling that customer loyalty is irrelevant since they have no option but to come back. On most of The Leadership Factor's surveys customer loyalty is measured in two ways: . Such reasoning is flawed on two counts. Fig. 2) Customers do come back when they have no other choice. If all competitors were equally easy to use then we would expect an almost perfect correlation between customer satisfaction and loyalty. the sophistication of the customers and the perceived switching barriers.supplier to use. The difference between markets is due to a combination of factors . 1) Customer loyalty goes beyond mere retention to a range of attitudes and behaviours.

A traditional sales approach can be likened to pouring new customers into a bucket with a hole in the bottom . for example committed customers tend to: o Come to you. One of the key benefits of establishing a good level of customer loyalty is that you don't have to sell to them. Loyal customers come back more and more often. This way of thinking also allows you to consider marketing approaches that don't require you to make back the cost of acquiring a customer in a single sale. o Buy more often. It has been demonstrated that it is up to 20 times more expensive to acquire a new customer than it is to keep an existing one. or intention to buy again. loyalty attitudes are termed commitment. Why should you worry about customer retention? • Customer lifetime value. . If customers find themselves forced to use you against their will they will come as little as possible.the weaker your levels of customer retention the larger the hole. This phrase relates to a very simple concept. Every interaction you have with a customer should be done on the basis that their value to you is the total of all the purchases they will ever make. since they enjoy the service they receive from you. Why should you worry about customer commitment? Committed customers have been shown to demonstrate a number of beneficial behaviours. For example your most valuable customers are probably not those who make the biggest purchases. they will come to you when they need a product or service. and they may even come on spec to see if you have new products.loyalty behaviour is gauged by a measure of retention. they're the ones who come back again and again. • The cost of acquisition. not that one sale.

Of course. they will be more willing to try new products. Which is why it is so essential to monitor customer satisfaction. Perhaps they will even trust you to suggest products suitable for them. A strong relationship of trust can mean that customers will prefer you even if it is more difficult or more costly to use you than a competitor. Another key benefit . Similarly if someone else tells you of a problem your trust in the supplier would be damaged. imagine that you have just started dealing with a supplier. Where a complaints system can allow you to see why some customers (those few who bother to complain) are unhappy. If customers are happy with what they've bought from you before. Eventually you may not even bother checking the invoice unless something catches your eye. and will not go to the trouble of shopping around before buying. and correct any problem areas. o Look only at you. The holy grail of customer loyalty customers at this stage trust you to provide a good product/service at a reasonable cost. o Recommend you. a . Why should you monitor customer satisfaction? Any breach of this trust can seriously damage the relationship you've built. the moment something goes wrong you go back to checking every item. but after a while (if they've all been correct) you'll tend to assume that the invoice will be accurate. To illustrate how this works.o Try new products. The key to these is the establishment of trust based on good service. o Buy only from you. To begin with you probably check every invoice carefully.loyal customers can become your most effective marketing tool (far more trustworthy than salesmen in the eyes of other customers) and they're free. reputation and image.

Building customer loyalty As an illustration of how the process of building loyalty can work. Once a CSM programme has been established it can be monitored and fed back to customers over time. the areas that will have the greatest impact in improving customers' overall perception of you. split by whether they had used out client before or not. 3) shows the value of a loyal customer base to this client . It will also enable you to prioritise improvement based on an understanding of what the 'key drivers' of satisfaction are. Another question (Fig.their reputation influenced 44% of their customers to use them. 23% were repeat users and 14% chose this supplier based on a recommendation. It shows that this company’s strong performance means that past customers are less likely to shop around than others. Fig. The company is building a very loyal customer base. . Figure 3.customer satisfaction measurement (CSM) programme allows you to actively identify specific problem areas based on statistically sound information and correct them. Figure 2. informing them of actions you are taking and sending a strong message about your commitment to customer service. 2 shows for one consumer client the percentage of customers that requested quotes from other companies.

satisfaction personality is not the same as loyalty personality. such as age. Figure 4.What makes up customer loyalty? Surveys have consistently shown very strong correlations between customer satisfaction and loyalty. Loyalty personality refers to innate differences in the way customers form their opinions. and that of other agencies. and is further subject to something called ‘loyalty personality’. suggests that customer loyalty is driven by a combination of customer perceptions such as satisfaction. It is important to note that the shape of the lines is different . In both cases scores tend to get higher with age. image and perceived value. occupation and location. Our work. . Commonly these differences can be predicted by a number of geo-demographic factors. gender. Figure 4 shows how customer satisfaction and loyalty vary by age. though they are usually similar.

If you're not making the most up-to-date product you may have to resign yourself to losing these many of them are still using telephone banking accounts. and how many have moved on to internet banking? How much money did they make for the telephone bank? o Level of involvement. The key word here is . the most significant difference is in how involved your customers feel with you. o Perception of switching barriers. and tend to be less profitable in the long term than customers who need a reason for switching. that they're no more likely to remain loyal to your competitors. reflecting the importance to customers of making the right purchasing decision. Some markets are more 'high involvement' than others. Some people will always be on the lookout for the latest product or trend. Beyond market-wide trends. however. and will tend to try something just because it's new. however good your service is. Switching barriers are the perceived obstacles to changing supplier.Common loyalty personality divisions might include: o Innovators/risk averse. though. Customers who moved to telephone banking when it first came out fall into this category . Rest assured.

What difference will it have made? The honest answer is that we can't be sure. The important thing is to make sure you focus on keeping the right customers. There are some customers that cannot be kept loyal. The perception seems to be that the process is very complex and requires enormous amounts of data. These 'terrorists' are customers that you are better off without since they're losing you business and you're probably making a loss on them anyway. how difficult is it really to change bank? Probably not nearly as hard as most people think. To predict what an improvement in satisfaction will mean to you in terms of loyalty and profit you have to model the relationships between these items. One message that is often missed is that it can be okay to write off customers. but it's in the interests of the big high-street banks to maintain this impression. and it is a valuable idea. Only a small number of companies at the cutting edge of customer research have managed to model the links between satisfaction. The most damaging customer is one who takes up your resources but doesn't yield commensurate gains. what's in it for you? You've surveyed your customers' levels of satisfaction and loyalty. But we can't prove this is the case for every organisation. and you've fired your terrorists. loyalty and profit. which is far from the case. you’ve focused improvement on the drivers of satisfaction and loyalty and seen these soar as a result. We believe that for almost every organisation improving customer satisfaction will improve customer loyalty. and we can’t predict by how much.'perceived'. just as there are some that cannot be kept happy. Concrete advantages At the end of the day. which will in turn improve profit. Worst of all they may be damaging you by criticising your performance. For instance. Of course the more . Increasingly the concept of 'firing' customers is growing in currency.

but your competitors are locking in customers by targeting loyalty. Explain briefly through an appropriate example. QUESTION 5 What is the ISO 9001: 2000 and how it can be beneficial and fit to an organization which is eager to excel in the growth development of its product and service. In simple terms the modelling of a relationship is no more complex than drawing a line of best fit on a scatter diagram. (5 marks) A practical method for helping service sector companies. Such an agency should also be able to employ more advanced techniques such as Structural Equation Modelling and Latent Class Regression. If you're experiencing high customer turnover. which are only available through specialist software. you're soon going to run out of prospects to pour in at the top of the is available the more reliable and precise a model will be. . and consumers are getting more demanding. however. particularly in developing countries. to implement ISO 9001:2000 quality management systems has just been published by ISO (International Organization for Standardization) and the International Trade Centre (ITC). 1 it is obvious that as satisfaction goes up so does loyalty. but the chances are you could make a start with existing financial data. Looking back to Fig. and unless you have a statistical background it is probably best to let an outside agency do the work for you. As a final thought for those that are still unconvinced about the concrete benefits of making your customers satisfied and loyal consider this: markets are becoming more and more competitive. Getting at the specifics of this relationship and understanding how reliable the equation is requires some statistical knowledge.

Resolutely practical in its approach it focuses on the discussions. such as accountants.ISO 9001:2000: A workbook for service organizations is designed to make it easier for service providers to achieve the benefits. With the aid of questions and checklists. engineers. The ISO/ITC workbook targets service organizations with less than 20 employees. which offers opportunities for developing countries in particular. planning an approach. it guides the service company manager through the following stages: making a decision to implement ISO 9001:2000. there are also chapters on getting certified. architects. designing the quality management system and managing documentation. One way that organizations in developing countries can increase their market share in such opportunities is by ensuring competitiveness through the implementation of a quality management system based on ISO 9001:2000. such as increased efficiency and effectiveness. For those organizations that wish to go further and have their quality management system audited and certified by an independent body. many organizations choose to . decisions and steps that make up a programme to implement an effective quality management system. According to the World Trade Organization WTO). Certification is not a requirement of ISO 9001:2000. of implementing ISO 9001:2000. which can be implemented solely for the benefits it brings internally and to the organization’s customers. The cross-border trade in services includes business process outsourcing and offshoring. The appendices include one giving tips on working with external consultants. At the same time.10 trillion. lawyers and management consultants. the value of world trade in commercial services increased in 2004 by 16 % to USD 2. and after certification.

The meeting process can . Selecting the best total quality management system for a company involves meeting with management members. A total quality management system starts with a meeting among top management. Owners and top executives typically make these decisions. nearly 33 % of ISO 9001:2000 certificates were held by organizations in the service sectors. Although developed with service enterprises in developing countries in mind. and integrating the selected tools into the company. creating a plan. QUESTION 6 Total Quality Management (TQM) system has laid out certain principle. These individuals should discuss the philosophical mind-set necessary and how the company will change because of it. guru approach. A company can select a system based on its production processes and number of employees. or organizational approach. top managers may need education on this practice.pursue certification and at the end of 2005. In some cases. (5 marks) A total quality management system often represents a philosophical mindset and a few basic management tools. Strategies to further develop the system include an elements approach. the hands-on approach of ISO 9001:2000: A workbook for service organizations has something to offer for service providers in developed countries too. Briefly explain on the total requirement of that concept and how it can be implemented in order to proceed the whole process diligently and come up with a good quality management.

Companies may only apply certain total quality management characteristics here to improve the company. the company can change or upgrade the elements to match changes in the business environment. The plan will detail which departments will change because of the new system. Going slow also prevents wasted capital on a total quality management system that fails to work. however.take several months in order to get all management team members on board with the total quality management system. An organizational approach to total quality management uses a company’s benchmarks for the system. so a company can create a planned hybrid system if desired. A slow integration process ensures the company can implement all features fully and achieve maximum benefit from the system. Consultants often have a specific approach or take on total quality management systems. Most total quality management attributes are individual. A guru total quality management system approach follows principles laid out by a leading consultant. The elements approach looks for specific business processes or activities that need improvement. Different strategies exist for selecting the best total quality management system. Benchmarks include financial ratios or other . Once the plan is complete. Once top management fully understands the effects of a total quality management system. a company should slowly integrate the attributes into its operations. As the guru tends to have copious experience in this process. managers can select the best system elements and how to measure the effects. At this juncture. if the guru’s system focuses on only one type of system and is inflexible for any others. Over time. they need to develop a plan. Problems can occur. Changes to the plan may also be necessary as plans on paper do not always come true. using this approach may be more appropriate than others.

a company can discover what processes lag in performance. . Total quality management attributes can work to alter and adjust business activities as necessary. Using a trend analysis for benchmarks over metrics.