Quality Costs - Service Industry

The majority of service industries are so called because in most cases, the service-provider does something on behalf of someone else (usually referred to as a customer or user) other than the mere shipment of goods.  In service industries, as distinct from manufacturing, the customer is part of the process and affects the quality of the process.  Today, the service sector contributes to over half the national income in India.

A polite customer will often receive a different quality of service as compared to that provided to an impolite customer.  The customer is present when the service is provided and observes the delivery of the service.  In the case of manufactured products, the customer may not be present when the product is made, and does not directly influence the quality.  In all other cases, there really is no distinction from a total quality point of view between manufacturing industry and a service industry.  In fact, in many instances, there may be more similarities between a service industry and manufacturing industry than between two service industries. 

What relationship, for example, is there between a hospital and a travel agency?  Fortunately, from a total quality point of view, this does not matter because we are dealing with a generic subject.  Only the vocabulary needs to be modified.  What is the hospital term which would be the equivalent to the manufacturing word ‘scrap’?  Or the banking equivalent to the manufacturing term, ‘rework’?

I have consistently maintained that the cost of poor quality is at least 20 per cent of sales revenue in commercial operations.  This figure is potentially much higher in non-profit organizations, partly because there is less pressure to become efficient and also because quality-related costs are often less visible.  In the case of government and other public organizations there is also much confusion as to who the customer is, what the mission is, and what the goods are.  This lack of focus inevitably leads to wasted effort and high quality-related costs.

In reality, the results of quality costs audits across the entire spectrum of industry all indicate that the true cost of poor quality can be as high as 40 per cent of sales revenue - even higher in some cases.  To say that quality costs are higher than 20 per cent of revenue is a safe assumption.  Bearing in mind that these costs can be halved in two to three years, it is obvious that something must be done.

Most of the literature related to quality-related costs refers to manufacturing examples. This is unfortunate because the cost of poor quality in non-manufacturing situations can be much higher.  Costs which usually appear in the literature include:

• Customer returns and repairs
• Scrapped products and components
• Defect-related inspection.

These are usually recorded and the costs known.

In the service sector, the direct equivalents to those deficiencies are far less obvious and may not be properly recorded or in some cases even known to those who are responsible.  For example, in the travel industry, the equivalent to customer repair or return may be booking the wrong hotel room.  In many cases this could be dealt with by the hotel staff, and it is possible that neither the hotel nor the customer will inform the travel agent of the error.  Nevertheless, the reputation of the agency will suffer, and consequently its market share will be lost without the agency knowing why.  Equally, the agent will not have the equivalent of a returned product appearing in the profit and loss account.

Finding ourselves in a WTO driven economic environment, my suggestion (unsolicited) to the Finance Minister is that he simply needs to mandate the excavation of national costs of poor quality in commercial, non-profit, government and public organizations!