Service Quality and Dimensions and Quality Control and Cost

TABLE OF CONTENTS

S.no Topic Name Page no

1 Service Quality 2-3

2 Important and Characteristics 4-5

3 Service Dimensions 5-10

4 Quality control 12

5 Process Control 12-13

6 Supervisory control and data acquisition SCA 13

7 Programmable logic controller 13

8 Distributed Control Systems 13-14

9 Control Chart 14

10 Product quality 15

11 Cost of Quality 15

12 Types of Quality Cost 15-16

13 Case Study 16-22

14 Conclusion 23

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 Service Quality and Dimensions and Quality Control and Cost

Service Quality

Introduction and Meaning

It is a combination of two words, Service and Quality where we find emphasis on the availability
of quality services to the ultimate users. The term quality focuses on standard or specification
that a service generating organization promises. We can’t have a clear-cut boundary for quality.
Sky is the limit for quality generation. Scientific inventions and innovations make the ways for
the generation of quality. More frequency in innovations, less gap in the process of quality up-
gradation.

Service Quality Concept

When defining the concept of service quality, one should always start with customers, as quality
is the most important factor for customers and also it is their basis of their opinion, which will
then result in the fact that service quality is achieved if the customer expectations are achieved.

While doing the service product design process, a significant element is the service quality, as it
influences the volume of demand for a given service product, as well as customer profile of this
service product. The most significant positioning tool of service providers and their offer on the
contemporary service market is the service quality.

The impact of quality service on profit and financial indicators of business performance is an
important aspect to understand in services marketing. Service quality must be viewed as a
strategic force, but also as the key problem of service marketing management.

As it affects the constant improvement of service performance by increasing market share and
profit growth, keep in mind that service quality is a significant source of sustainable competitive

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advantage. This will yield an increase in financial results and will achieve sustainable
competitive advantage.

Quality-based service marketing strategy is sustainable, as not all competitors can achieve the
service quality expected by the consumers. Hence those service companies that base their
strategies on the quality have an excellent reputation, and this feature of their quality poses a
barrier to developing competitive copycat marketing strategies.

Service providers define and attain the service quality, while consumers perceive quality during
the service delivery process. The way consumers perceive moments of truth is directly reflected
on the evaluation of total quality service, especially in services whose deliveries are repeated,
which implies a highly professional approach to moments of truth, aimed at building and
maintaining long-term consumer relations. Improving service quality and building long-term
consumer relations requires good knowledge of moments of truth, i.e. activities carried our
within those, as well the customer perception of those.

Quality-based service company management should especially focus on four key

areas important for achieving quality:

i. Service encounters (moments of truth)

ii. Service design;

iii. Service productivity

iv. Service provider’s corporate culture.

Without the appropriate design of service provision systems, service exchange on the market is
not possible as its functioning enables efficient service delivery. In service design decision-
making, the key problem is related to the choice between the service personnel and the
technological support to the service delivery process, depending on whether the service provider
is focused on achieving maximum efficiency.

The main understanding of service quality is the customer’s view of service quality is connected
to certain benchmarks, if a given service can be standardized. Disagreements regarding the

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nature of service quality are mostly related to the relationship between satisfaction and service
quality, and in addition to quality, satisfaction is affected by a larger number of factors.

Service quality has been defined keeping in view at least four perspectives:

(i) Excellence – Although the mark of an uncompromising student and high achievement, the
attributes of excellence may change dramatically and rapidly. Excellence is often externally
defined.

(ii) Value – It incorporates multiple attributes, but quality and value are different constructs—
one the perception of meeting or exceeding expectations and the other stressing benefit to the
recipient.

(iii) Conformance to Specifications – It facilitates precise measurement, but users of a service

may not know or care about internal specifications.

(iv) Meeting and/or Exceeding Expectations – This definition is all-encompassing and applies
across service industries, but expectations change and may be shaped by experiences with other
service providers?

Most marketing and researchers have concentrated on the last perspective. The Gaps Model of
Service Quality reflects that perspective and offers service organizations a framework to identify
services in the form of the gaps that exceed (or fail to meet) customers’ expectations.

Service Quality – Characteristics and Objectives

The main characteristics of service quality are as follows:

(i) Clients are a direct part of the process, bringing perceptions and expectations to the
transaction that become part of their interaction with you.

(ii) Unlike a manufactured product, which can be made, inspected, and controlled for quality
before it is released to the client, service quality cannot be inspected before delivery.

(iii) Because clients participate fully in the transaction, they are concerned both with the output
or result of the transaction, and the process for delivering that outcome.

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(iv) In a production environment, eliminating variance is critical to making high-quality goods.

In delivering service, satisfying clients depends not on eliminating variance, but rather on
personalizing the service delivery to the unique circumstances of each transaction. Applying
certain principles consistently rather than providing an identical response to each transaction, is
the key to delivering quality service.

(v) Client satisfaction is subjective. It is made up of two essential ingredients—expectations and

perceptions of delivery. Clients have unique expectations based on their individual experience
and needs. They have their own perception of what they received. Any difference between what
they expected to get and what they perceive they got, will affect their satisfaction

Objectives of Service Quality:

The subject of service quality has aroused considerable recent interest among business people
and academics. Of course, buyers have always been concerned with quality, but the increasing
competitive market for many services has led consumers to become more selective in the
services they choose. Conceptualizing the quality for services is more complex than for goods.
Because of the absence of tangible manifestations, measuring service quality can be difficult but
there are possible research approaches.

Comprehensive models of service quality and their limitations can be studied. Understanding just
what dimensions of quality are of importance to customers is not always easy in their evaluation
process. It is not sufficient for companies to set quality standards in accordance with misguided
assumptions of customers’ expectations.

A further problem in defining service quality lies in the importance which customers often attach
to the quality if the service provider is distinct from its service offers – the two cannot be
separated as readily as in the case of goods. Finally, issues relating to the setting of quality
standards and implementation of quality management should be studied.

Service Quality – 5 Important Dimensions

Service quality is a perception of the customer. Customers, however, form opinions about service
quality not just from a single reference but from a host of contributing factors. Service marketers
need to understand all the dimensions used by customers to evaluate service quality.

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David Garvin in the article ‘Competing on the Eight Dimensions of Quality’ identified the
following eight dimensions of quality applicable to both goods and services.

These include – Performance, Features, Reliability, Conformance, Durability, Serviceability,

Aesthetics, Perceived quality or prestige

In a further refinement of their earlier factor identification, Parasuram, Zeithmal and Berry have
identified the following five dimensions of service quality as crucial.

Dimension # 1. Reliability:

This dimension is shown to have the highest influence on the customer perception of quality. It is
the ability to perform the promised service dependably and accurately. Sahara Airlines, an
upcoming domestic air carrier within India, has been striving to protect itself as a reliable airline.
It hopes to differentiate itself from other airlines Indian Airlines. To protect this reliability,
Sahara Airways has a scheme of full refund plus a coupon of Rs.3,000 to every passenger on
delay of flights by more than 59 minutes.

When service delivery fails the first time, a service provider may get a second chance to provide
the same service in the phase called ‘Recovery’. The expectations of the customer are usually
higher during the recovery phase than before because of the initial failure. Thus, the service
provider is likely to come under greater scrutiny, thereby increasing the possibility of customer
dissatisfaction. The reliability dimension, which ensures timely delivery time after time, helps
the service provider to meet the customer expectations fully at the lowest level of service
expectation.

Dimension # 2. Responsiveness:

It is the willingness of the service firm’s staff to help customers and to provide them with prompt
service. The customers may have queries, special requests, complaints, etc. In fact, each
customer may have problems of his or her own. While the front- end employee may have been
trained or equipped to deliver standardised services, the customers want them to go beyond this

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limit. It is the willingness to help the customer or willingness to go that extra distance that is
responsiveness.

Example – A customer calls room service to find out if they would pack a Jain lunch. It is not
the hotel’s normal policy to cook such specialty and customised meals. However, the customer
being very religious minded would be very pleased if the hotel could pack it for him to carry and
eat. This may impose some strain on the kitchen. However, the hotel may be rewarded in two
different ways if it agreed to provide the meal. The customer would be very pleased with the
service and is very likely to recommend the hotel to his friends and acquaintances.

In addition, the hotel could charge extra commensurate with the extra efforts. He is unlikely to
mind paying more. The second aspect of responsiveness is speedy response to a customer
request. When response is delayed customers usually loses interest. Many sales representatives
respond on the phone, ‘I will call you back’. The call is never returned. The customer draws his
or her own conclusion about the quality of service he is likely to receive in the future.

Dimension # 3. Assurance:

It defined as the ability of the company to inspire trust and confidence in the service delivery. It
refers to knowledge and courtesy of the service firm’s employees and their ability to inspire trust
and confidence in the customer toward the company. This dimension is considered vital for
services that involve high risk as customers may not be able to evaluate all the uncertainties
involved in the process by them.

Example- Medical services requiring complex uncommon procedures, sales/purchase of

financial securities, investment issues, legal affairs, etc., demand this service quality dimension.
There are property developers/builders who provide a list of previous buyers of flats or
apartments to potential buyers.

The evaluation of construction services is beyond technical capabilities of most buyers.

However, the prospective customers are free to call the previous customers. When prospective
customers hear from them about the company and its satisfactory delivery, they feel assured and
develop a more positive attitude towards the company.

Dimension # 4. Empathy:

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It refers to the caring, individualized attention the service firm provides each customer. When
service provider puts himself in the shoes of the customers, he may see the customer’s viewpoint
better. When customers feel that the provider is making his best effort to see their viewpoint, it
may be good enough for most. 

Example, a lady customer with a young child arrives slightly late at the check-in counter and
requests the agent for a seat along the aisle and near the toilet.

Even if all such seats have already been taken up, the agent and the airline may make even effort
to request another passenger to exchange seats and meet the customer demand. The lady
passenger would be delighted if her request could be honoured despite the last minute checking
in, and even if she does not get such a seat, she would be grateful for their effort.

Dimension # 5. Tangibles:

It refers to physical facilities, equipment, and appearance of a service firm’s employees. The job
of the tangible and physical evidence of a service is multifunctional. When a patient in the
waiting room of a clinic sees the doctor’s certificate, he becomes aware of the quality of service
he is about to receive.

If a dental clinic provides patients with clean rubber footwear and freshly laundered bibs or coats
before the actual service, the patients and their accompanying relatives or friends will be
impressed. A dentist dressed in a spotless white coat is likely-to impress, them even further.
Tangibles provide the customer proof of the quality of service.

Service Quality – Quality Standards

Quality standards were developed in the context of production and manufacturing initially. The
main reason was to improve the product quality and conformance. This performance of quality
now implies to all areas of marketing too.

This is because all the functional areas together impact the organization’s performance and
customer satisfaction levels. The aim of Quality systems is to reinforce performance with major

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focus on procedures and processes. Thus some quantifiable standards called benchmarks are
formed to be able to maintain a set service quality standards.

Many an international quality performance standards like National – BS (British Standard) 5750,
European – EN 29000, International – ISO 9000 have been used to maintain service quality. BS
5750 can be said to be the first standard of its kind. The British Standards Institute (BSI) gave us
standards to measure the service. The main parameter is that quality is really what is perceived
by the customer.

Quality systems of any company should match international standards like that of BSI
recommendations. Quality has to be functional, not restrictive and relate to all activities of the
organization. Also the good service quality calls for commitment of everyone in the organisation,
and not just a specified quality manager.

Better the quality, more is the value which the customer gets. This leads to a better corporate
performance.

1. Benchmarking:

An organization, which has fully researched quality issues in both its internal and external
markets, should now be in a position to set quality standards which can be regulated and
monitored and which meet customer requirements. In order to do this, standard measures need to
be determined.

The establishment of a baseline figure and a common index is an essential part of measuring
performance, both externally and internally. The baseline is the target operating norm of the
organization. This can be termed a benchmark (a standard against which performance can be
measured).

Nowadays when we talk of standards, the same has to be measured in comparison to

competitors. For example, that airlines can judge their benchmark standards by looking at other
airlines’ quality standards. At the same time the airlines will also have to study the standards of
related fields of business like railways and other alternative forms of travel.

2. Quality Process:

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The quality process for service organisations can be listed as follows:

(i) Define quality in the organisation.

(ii) Get a market research, done internally and externally.

(iii) Take in a competitive analysis.

(iv) Develop quality standards which is a process of Benchmarking.

(v) Judge actual performance with the benchmark quality standards.

(vi) Develop a Quality Strategy for getting rid of quality gaps.

(vii) Design programmes for proper quality standards implementation.

(viii) Control and monitor the service quality performance of the company regularly.

The procedure above would need a through study of the procedures/frameworks, training and
communications.

Implications of Service Standards:

Service standards are on a rise in today’s global world. In the competitive and dynamic world of
today, technology has lead to redesigning of the service standards drastically. Where a normal
TV was the basic need in a hotel, today LCD has replaced the same as & basic need.

An internet service in the room which was a delight need for the consumers has today become a
basic or core need of the consumers. Thus today the service quality standards are raising their
bar.

For example in a traditional measurement system in a company’s training division, the instructor
and his quality was the only service standard checked for the training. When one does a market
research of the audience, one could find three more factors which could affect the service quality
of this training which are specific requirements like- (1) Instructor’s style, (2) Instructor’s
expertise, and (3) Instructor’s management of class.

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The company should invest in customer-defined standards project so that the resulting
measurement system is more successful in judging the consumers requirements.

The level of customer requirements will generate a customer-defined standards which will lead
the company to a concrete behaviour and actions.

Bajaj Scooters

At one time, customers considered Bajaj scooters to be of the best quality due to their reliability.
Today, the two-wheeler market is full of motorcycles that deliver faultless service with minimum
maintenance and are deemed to be of exceptionally high quality by the customers.

The quality perception of Bajaj scooters has, thus, suffered due to competition. Similarly, the
quality expectations of mobile telephony services have gone up due to increase in competition,
including that from WLL service providers.

It is therefore in the service provider’s interest to take a periodic and regular survey of offers by
the competing firms and adopt the standards that are crucial for the high quality perception of the
customers. The standards must be internalized by bringing them to the notice of both front-end
and back-end employees.

It is a good idea to formally set such standards before the employees and even post them at
prominent places in the service setting to make both customers and employees aware of them.

The factors that contribute to the quality perception may vary from one industry to another, and,
therefore, each industry needs to identify the specific factors that may contribute to this industry.

Thus, even an industry-wide standard may be developed that judges the performance of each
participant in the process.

For example, the mobile telephony services in India would do well to compare themselves
along the dimensions of the service such as:

1. Strength of the signal within covered geographic area

2. Clarity of the message

3. Frequency of call failure

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4. Time required for the delivery of the SMS

5. Accuracy of billing

6. Actual time period between physical receipt of bills and the last date for payment

7. Accuracy of bill settlement.

Asad Unar (011) and Ghullam Ali (48(17-18))

Quality

Quality is the general features and characteristics of a product or service that affect its ability to
meet specific requirements.

Quality control

Quality control (QC) is a process or set of processes aimed at ensuring that a manufactured
product or service meets a defined set of quality standards or meets a customer or customer's
requirements. QC is similar to quality assurance (QA), but not the same. QA refers to ensuring
that a product or service meets certain requirements, and QC refers to actually testing those
items. QA is sometimes referred to as a single term along with QC: Quality Assurance and
Control (QA / QC). First, determine the specific criteria that a product or service must meet.
Next, you need to determine the range of QC indicators. For example, the percentage of units
tested from each batch. Next, you need to collect the actual data. NS. The percentage and results
of failed units will be reported to management staff by. Next, corrective actions need to be
determined and implemented.

For example, a defective device needs to be repaired or cleaned, and improper service needs to
be repeated free of charge until the customer is satisfied. If you have too many equipment

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failures or services are inadequate, you need to make plans to improve your production or service
processes. Next, we need to put this plan into action.

Process Control
Control Chart
Product Quality

Process control

Process control is the ability to monitor and coordinate processes to achieve the desired output.
Used in the industry to maintain quality and improve performance. Process control systems
(PCS), also known as industrial control systems (ICS), act as equipment along the production
line during manufacturing, testing processes in a variety of ways, and data for monitoring and
troubleshooting.

There are different types of process control systems, including

Supervisory control and data acquisition (SCADA),

Programmable logic controllers (PLCs)
Distributed control systems (DCS).

Supervisory control and data acquisition SCADA Description:

Monitoring Control and Data Acquisition (SCADA) is a system of software and hardware
elements that enables industrial companies to:

With devices that monitor, collect, and process real-time data that controls industrial
processes locally or remotely.
Log event to log file

Programmable logic controller

PLC is an abbreviation for "programmable logic controller". PLCs are computers specially
developed for reliable operation in harsh industrial environments (such as extreme temperature,
wet, dry, and / or dusty conditions). PLCs are used to automate industrial processes such as
production plants, ore treatment plants, and sewage treatment plant assembly lines. The PLC
shares many of the features of a home PC. Both have a power supply, CPU (Central Processing
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Unit), input / output (I / O), memory, and operating software (although this is separate operating
software). The PLC query process consists of the following steps:

Operating system starts the cycle and monitors the time.

The CPU starts reading
CPU starts running a user or application program written in relay ladder logic or another
PLC programming language.
The CPU then performs all internal diagnostic and communication tasks. Writes data to
the output module so that all outputs are updated according to the results of the program.
This process will continue as long as the PLC is in operating mode.

Distributed Control Systems

Distributed Control Systems to play an important role in large and complex industrial processes
compared to previous centralized control systems. This distribution of control system
architecture across the plant has provided a more efficient way to improve control reliability,
process quality, and plant efficiency. Today, distributed control systems are found in many
industries such as chemical plants, oil and gas industries, food processing plants, nuclear power
plants, water management systems, and the automotive industry.

Control charts

Control charts are used to see how a process changes over time. The data is plotted in in order.
The control chart always has an average centerline, an upper limit for control, and a lower limit
for control. Attribute data control charts are used individually.

Product quality

Product quality is a collection of all product features and properties that help meet customer
needs and requirements. This is the ability of the product to do what the end user wants and
perceives as value.

Mazhar Ali and Amjad Bhanjwar

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Introduction to Cost of Quality (COQ)

The business environment is turning out to be progressively more serious. There are numerous
choices accessible to the buyer for practically every item available. Organizations should remain
value cutthroat to endure. The top performing organizations put themselves aside from the
opposition by paying attention to the voice of the client and giving items that meet the client's
prerequisites while keeping a significant degree of value and constancy. These organizations
measure Cost of Quality and utilize the data acquired for their potential benefit. The standard
of Cost of Quality is like a business that broadcasted years prior on TV that promoted oil
channels. The slogan was "Pay Me Now or Pay Me Later". The message was that preventive
upkeep of your vehicle could forestall all the more expensive fixes not too far off. Cost of
Quality is a lot of something similar. An association can decide to put resources into forthright
quality expenses to diminish or forestall disappointments or pay in the end when the
imperfection is in the end found by the client.

What is Cost of Quality (COQ)

Cost of Quality is a methodology used to define and measure where and what amount of an
organization’s resources are being used for prevention activities and maintaining product quality as
opposed to the costs resulting from internal and external failures.

How to Measure Cost of Quality (COQ)

The methods for calculating Cost of Quality vary from company to company. The Cost of
Quality can be divided into four categories. They include Prevention, Appraisal, Internal Failure
and External Failure. Within each of the four categories there are numerous possible sources of
cost related to good or poor quality. Some examples of typical sources of Cost of Quality are
listed below.

The Cost of Good Quality (CoGQ)

Prevention Costs – costs incurred from activities intended to keep failures to a

minimum. These can include, but are not limited to, the following:
Establishing Product Specifications

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Quality Planning
New Product Development and Testing
Development of a Quality Management System (QMS)
Proper Employee Training
Appraisal Costs – costs incurred to maintain acceptable product quality levels.
Appraisal costs can include, but are not limited to, the following:
Incoming Material Inspections
Process Controls
Check Fixtures
Quality Audits
Supplier Assessments

The Cost of Poor Quality (CoPQ)

Internal Failures – costs associated with defects found before the product or
service reaches the customer. Internal Failures may include, but are not limited to,
the following examples:
Excessive Scrap
Product Re-work
Waste due to poorly designed processes
Machine breakdown due to improper maintenance
Costs associated with failure analysis
External Failures – costs associated with defects found after the customer receives
the product or service. External Failures may include, but are not limited to, the
following examples:
Service and Repair Costs
Warranty Claims
Customer Complaints
Product or Material Returns
Incorrect Sales Orders
Incomplete BOMs

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Shipping Damage due to Inadequate Packaging

Case study

Applying Cost of Quality to a Service Business

COQ programs are controversial. Some experts have called them “a useful tool” and others “a
waste of time and money. At this point, there are few solid examples of firms that have
successfully implemented and maintained a COQ program as prescribed by such agencies as the
American Society for Quality Control. In particular, there are few examples of sustained COQ
programs that have become an integral part of an organization’s total quality plan or overall
management process.

The object of my research was the U.S. marketing division of Xerox. The interview of key
players was taken, the controller, the cost of quality manager, and functional manager in
addition to corporate senior managers. Xerox executives were fully cooperative, asking only
that certain financial information be kept confidential.

Quality at Xerox

In the 1970s, Cannon, Minolta, IBM, Kodak, and other foreign and domestic competitors
entered the global copier market and began making significant gains in market share at the
expense of Xerox. In 1984, senior managers launched a dramatic program to change the
company’s culture and raise its commitment to quality. They were rewarded in 1989 with the
prestigious Malcolm Baldrige Quality Award. Senior managers credit “quality fever” with
reversing the negative market trend.

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The Xerox approach to COQ differs somewhat from those programs described by ASQC and
others. Xerox defines three categories of quality costs: (1) the costs of conformance (prevention
and appraisal), (2) the costs of nonconformance (failure to meet customer requirements before
and after delivery), and (3) the costs of lost opportunities. The classic COQ model includes the
first two categories, but the third category is unique to Xerox (see Table 1). The company’s COQ
guide explains that lost opportunities are measured as the profit impact of lost revenues. 6
These occur, for instance, when a customer chooses a competitive product over a Xerox
product, when a customer cancels an order because of inadequate service, or when a customer
buys Xerox equipment that is inadequate or unnecessary and switches to another brand.

Lost opportunity costs are directly influenced by conformance and nonconformance costs. For
instance, in the event of a product failure, the company must use resources to correct the
problem (nonconformance costs) that could be used for other opportunities. Employee training
to build quality awareness is a conformance cost that likewise drains resources that could be
used elsewhere. Thus quality directly influences lost opportunities, which translate directly into
lost revenues.

The USMG Model

Settled in Rochester, New York, the U.S. advertising bunch (USMG) comprises of 35,000
workers, 65 deals regions, and 5 deals areas, and it is answerable for more than 5 billion dollars
in yearly deals. The division buys supplies and gear, for the most part record handling items,
from Xerox fabricating divisions worldwide and sells them all through the United States.
Division leaders were very much aware of the quality campaign happening all through Xerox,
however they deferred participate until 1987.

The underlying COQ gauge for USMG was $1.05 billion every year or 25% of deals income. This
persuaded ranking directors to think about the program, however they were hindered with the
errand of interpreting the customary definitions utilized in assembling to a help setting. They

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battled with COQ estimates that emphasis on item cost. How would we characterize "item"?
How would we gauge nonconformance cost? What are our estimation guidelines? At last, they
characterized their item as 100% consumer loyalty. Their responsibility is to convey the actual
item and fulfill client assumptions. They depended intensely on the quality teaching of
"readiness for use."

The division's definitive definitions vary from the customary model in more ways than one.
Conformance costs at USMG incorporate preparing, correspondences, and reviews to
guarantee that activities are done accurately the initial time. Nonconformance costs are those
caused from not gathering client prerequisites for administrations like preparing on hardware.
A nonconformance cost may be the extra assets consumed to return to a client and give better
directions, or the assets used on an excessively intricate show. Lost not really settled as in the
corporate Xerox model. They happen, for instance, when a client drops an assistance contract.

Implementation

It should initially be said that USMG's achievement in conceiving its program, which is
remarkable among Xerox divisions, is straightforwardly owing to corporate's grounded quality
culture and accentuation on process. Corporate applied solid tension on its divisions to accept
quality projects. It prepared administrators in critical thinking and the COQ interaction. COQ
was introduced not as the response to all issues, yet rather as a device for positioning interests
in quality projects. The division CFO's readiness to support the investigation was basic.
Organizations without a solid quality culture and the unmistakable help of senior administration
can not carry out a program like this one.

It was not simply one more expense decrease program; the emphasis was on further
developing strategic policies with a definitive objective of complete consumer loyalty. The
directors obviously conveyed that the actions would not be utilized to pass judgment on
individual execution or to take out positions. This significantly worked with specialist inclusion.
Third, measures depended on harsh numbers, not careful computations. There were no month
to month or quarterly advance reports, and COQ measures were not accommodated with
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bookkeeping. This way the responsibility was limited, and COQ figures were not utilized as
targets.

One of the primary inhibitors of a practical COQ program is the bookkeeping information. Most
bookkeeping frameworks can catch conformance costs (avoidance and evaluation) and
nonconformance costs that are inward (i.e., fixing issues before they arrive at the client).
Nonetheless, these frameworks experience difficulty obliging outside nonconformance costs
(i.e., compensating for disappointments recognized after conveyance), which commonly
comprise around 70% of disappointment costs. Likewise, bookkeepers regularly scoff at these
deviations from standard bookkeeping practice. By keeping the COQ estimates separate from
the customary monetary announcing framework, ranking directors kept consideration zeroed in
on the proper issues.

Program implementation began with an extensive education program. All field managers and
exempt headquarters employees participated in a one-day training program at which they
received abundant, clear, and practical support materials.

A manager from the controller’s office was appointed Manager of Cost of Quality. The CFO
made cost of quality the division’s financial quality project. The functional quality manager for
finance was given the responsibility of coordinating the cost of quality program. Under Xerox’s
Leadership through Quality program, each major functional area is responsible for designing
and leading a quality project.

Using Pareto analysis, the group listed and ranked the major problems based on their subjective
estimates of each problem’s cost, potential for correction, external customer impact, degree of
difficulty; and project size.

The 1989 list of top quality problems included the following:

Time spent by sales and service personnel on work other than customer calls.

Sales personnel turnover.

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Management of equipment term leases.

Parts repair.

Spare parts inventory.

Spare parts usage.

Air freight charges.

Product costing.

Obsolescence.

Third party financing arrangements

Eleven teams were formed to tackle these projects. Each team included a senior staff
member, representatives from appropriate functions, and a controller. The members
determined the total cost of quality in their area by comparing the costs in a perfect
world with the costs in their real world. For instance, the cost of running the sales
department if there were no personnel turnover was subtracted from the cost of
running the sales department with current turnover rates. In the spirit of using “roughly
right” estimates, the teams did not hesitate to establish total COQ figures. The
controllers were heavily involved in helping the teams to estimate costs and pull
information from standard cost data. The vice-president of finance, who assigned the
controllers, was adamant about their involvement. To him, the controllers were far
more than accountants; they provided necessary support to the line managers.

The president empowered the teams to plan and execute changes that would lower quality
costs. The teams were expected to determine root causes of problems and define systemic
issues. The emphasis was on process over goals and positive change over measurements.
Each team would report their accomplishments to the senior staff once a year.

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Successes

To give an illustration of how a quality issue was dealt with, think about thing ten: outsider
financing courses of action. USMG had a game plan with a Xerox/Dana Corporation joint
endeavor called Xerox Equipment Leasing, Inc. (XELI). USMG offered gear to XELI, which rented
it to clients with the choice to purchase. Clients got a lower regularly scheduled installment and
went through tax reductions for bought capital hardware. Xerox ensured lingering esteems to
Dana toward the finish of the term if the client didn't buy the machine. Somewhere in the range
of 1985 and 1989, USMG sold more than 8,000 machines through the program and created
more than $200 million in income.

Organization bought new Xerox hardware. The colleagues who researched this issue included
agents of money, estimating, item promoting, and significant record advertising. They broke
down the financial aspects to the client, checked on the motivators for the salesmen, and
talked with clients. They found that clients never planned to take title of the hardware, that
they considered the program essentially a working lease

Subsequently the issue was a bookkeeping one. Most clients didn't truth be told leave Xerox, so
to make an interpretation of the retraction rate into a negative bookkeeping charge was
mistaken. The group rebuilt the bookkeeping framework, in this way diminishing the negative
charge to pay by $8 million. What's more, $300,000 in lingering excessive charge that would
have wrongly gone to Dana under the old framework was additionally recovered.

The executives of gear out of date quality had likewise been recognized as an issue (thing nine).
By and large, the yearly gear out of date quality cost had been running at $20 million to $25
million every year. Under the COQ program, money and hardware staff framed a group to
check out these expenses. They met week by week and searched for evaluating advancements,
significant record offers, deals to unfamiliar partners, and other conceivable interior clients of
the hardware. They thought about the expenses of renovating hardware and rescuing spare
parts. One of the colleagues said, "We deal with the off-rent hardware as though it was a gold
mine!" The group made a forceful objective of decreasing out of date quality cost to $14 million

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every year. In 1989, they diminished this cost to $8.6 million, well beneath their underlying
objectives.

USMG’s total initial COQ estimate was $1.05 billion. The eleven selected projects totaled $250
million. In its first year, the program reduced COQ overall by $53 million (see Figure 1). Xerox
senior management considered these results outstanding. And the results had great credibility
because they correlated highly with the division’s 1989 profit results. Although dramatic, these
changes were relatively painless. No one was laid off and there were no drastic cost-cutting
measures, just process change and working smarter. The precision of the estimates was of little
concern, but the correlation to the financial results gave real credibility to the achievement.

Conclusion

This study suggests that a COQ program that focuses on operations, one that uses “roughly
right” accounting and nonaccounting data, is more useful and provides more valuable
information than elusive accounting systems that try to be everything to everyone. The best
systems are designed for a purpose. Management accounting should focus on a network of
studies rather than a single massive system. This approach is very much in harmony with
activity-based accounting.

The program’s success shows that management accounting can provide the impetus for
organizational change. At USMG, the COQ program increased cross-functional cooperation and
stimulated managers to make significant operational changes. The results are dramatic — $54
million saved in one year — and are corroborated by profit results, but again the important
point is not the accuracy of this figure, but the fact that it represents real efficiency gains and
that it serves as a motivator for future changes. The success of USMG’s effort demonstrates the
robust potential for cost of quality programs.

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Asfand Yaar Ali (48)

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