Many businesses are feeling the pinch due to increased competitive forces and on-going pressures to reduce costs, while at the same time facing demands for improved flexibility, superior customer satisfaction and exceptional quality levels. These may seem like conflicting requirements, right? Wrong!
“Surely higher quality levels must result in increased costs and therefore a reduced bottom line profit…or is quality a silver bullet that will cure all issues and drive profits upwards?”
While quality improvements have proven to be beneficial to business results, it can unfortunately not be over simplified. It will therefore make sense to explore the connection between quality and financial performance. Cost of quality or more aptly, cost of non-quality is that very link.
At this point two thoughts might cross your mind:
- Cost of non-quality applies only to production operations and is not applicable elsewhere in the
- Cost of non-quality is not an unfamiliar concept and any good manager will know how it is made up and that it is less than 1% of the total cost of sales – after all, very few managers will admit that quality is out of control in their business.
It is therefore important to set the record straight before we continue to explore the supposedly well–known concept called cost of non-quality. While it is normally easier to measure cost of non-quality in a production environment where things are more easily quantifiable, it can be measured in any part of the business and for any business process.
Furthermore, don’t fool yourself – your cost of non-quality could be in excess of 10 to 15 times of what you think it is unless your company is pushing world class quality limits. Often we find that the cost of non-quality accounts for between 15% and 20% of cost of sales…“No way!” will be a typical reaction at this point, but don’t stop reading now. As much as it may sound like a disaster to have a cost of non-quality equal to 20% of your cost of sales, it is clearly a huge opportunity to improve your company’s financial results.
World class companies can achieve a cost of non-quality as low as 2.5% of cost of sales, so even if you reduce from 20% to 10%, there is still a lot of possibility for further improvement. More importantly, reducing your cost of non-quality from 20% to 10% of cost of sales will push you profit up significantly without you having to increase sales or selling prices.
Now, before you get all excited about all the money you are going to save, you first need to understand what your non-quality is costing you and to understand that, you need to know what the cost of non-quality comprises of.
“Easy, cost of non-quality is the total of scrap, rework and warranty costs, but surely that cannot add up to 20% of the cost of sales?” That is exactly the point – those factors are only the tip of the cost of non-quality iceberg.
Below are a few of those costs of non-quality that we tend to overlook when reporting this indicator – that is, if you do report on it.
Cost of lost time due to duplication of work to correct errors
Whenever quality issues cause us to redo work to correct the errors, it impacts on available time to do other value adding profit generating work. The accountants call this opportunity cost. Unfortunately the time lost due to redoing work caused by poor quality is not restricted to only the people redoing the work – in many cases it can consume significant amounts of management time.
For example, managers may have to approve the expenditure for the rework, be involved in the problem solving process or in managing external stakeholder relations. In some cases the time required to correct errors can cause significant factory downtime or lead to temporary suspension of services.
Other examples include cases where incorrect or late documentation can cause incorrect customer order fulfilment or incorrect invoicing, causing customer frustration, delayed payment and ultimately lost business. Poor quality communication can result in misunderstandings, unnecessary conflict and incorrect execution of instructions.
Quality failures result in dissatisfied customers which impacts on cost of non-quality in a direct and indirect manner. Direct costs can be attributed to the time and costs incurred to deal with consumer affairs, complaint handling and product repairs or replacement.
Indirect costs include damaged reputation, reduced customer loyalty and even lost sales. Loss of reputation is however not only linked to external parties, as people in large corporates will well know – unpredictable profit and loss statements or even unpredictable forecasts can result in tremendous internal pressures from head office when actual results does not match the plan.
Other costs of doing things wrong
It is impossible to foresee all potential issues and resulting cost factors, but when considering measurement and reporting of the cost of non-quality, be sure to include all cost factors related to things going wrong or things not getting done right the first time.
The people side of cost of non-quality
In addition to those costs that we can quantify, admittedly some easier than others, there are those costs that are so difficult to measure due to its intangible nature that we are not even proposing that these be included in the analysis – unless you have reached world class levels.
Excluding these factors from the analysis does not mean that one should ignore their impact. Continuous exposure to unresolved issues or having to redo work caused by mistakes others have made can be hugely frustrating and will cause poor employee morale.
Closing thoughts and lessons learned
- Quality improvement and cost reduction are compatible, but it requires that we do not leave things to chance.
- Understanding your real cost of non-quality is key for identifying improvement opportunities that will impact directly on your bottom line profit.
- Measuring and reporting cost of non-quality will create awareness and provide justification for investing time and money in achieving the improvements.
- Real time measurement and monitoring through Visual Management techniques will make it easier to identify the issues and speed up solutions.
- Continuous improvement, driven by a common sense low cost approach will aid the fight against non-quality. Do however be careful not to get trapped into using increasingly complex tools to deal with this challenge.
- Successful organisations are constantly evolving. They change their products, services and processes and they change those things that contribute unfavourably to the cost of non-quality – this makes managing change a vital skill. When quality works, we take it for granted – it is only when it fails, that we truly realise its value.
Who Are Your Real Competitors?
Do you know who your real competitors are, and why they’re winning business you could get?
When entrepreneurs talk about their competitors, the talk is usually disparaging rather than admiring. The competitor gives bad service, they cheat, they only get business because of bribes or political connections, they deliver inferior products and do not pay taxes to reduce their prices. We seldom hear that their technology is great, their service levels enviable and their legendary efficiency allows them to sell at great prices. Yet many competitors must be as good or better than you; they are making sales while competing with you.
We want to see ourselves as better than our competitors, so we focus on their faults. Instead, rather develop your own value proposition, one that really does offer something special and preferably unique to the market. Then see how your value proposition stacks up against theirs. Doing this can be a sobering experience, you may find that you are not the greatest after all.
You then have the opportunity of improving your products, customer service, pricing, communications and customer relations to become competitive.
So far, I have talked about traditional competitors selling similar products and solutions to yours. Prof. Michael Porter produced a neat model, the Five Forces of Competitive Position, showing that aside from traditional competitors there were competitive forces in the power of buyers, the power of suppliers, the threat of new entrants and the threat of substitutes.
In many industries the buyer-seller relationship is a very unequal one, especially if the buyer is a large organisation and the supplier is an SME. The buyer may allocate delivery slots, dictate pricing and terms and generally be in a position to give advantage to certain suppliers and make life difficult for others. Equally, where the supplier is extremely powerful they may dictate to their resellers.
Typically, the franchisor or supplier tells you how and where you may trade, forbids you to sell other goods and influences your pricing. In both these cases the imbalance of power means the rules may change adversely at any time.
Related: Competitor Analysis Example
The really serious competitive threats are of new entrants and substitutes, and these two threats are sometimes combined. Large local and international operations looking for growth could see the sector you occupy as an attractive opportunity. New disruptive technologies can change the rules and immediately capture large shares of the market. We may think that these trends will not affect our SME but there are numerous examples to show that is not true.
Simple ‘mom’s taxi’ school transport operations have been badly affected by Uber in wealthier areas. Precision engineers find themselves in hot competition with nerds equipped with 3D printers, legal and medical advice is dispensed online and even long-standing NGOs find themselves in competition with international apps. No one is immune from all the changes coming.
It’s a good idea to figure out a competitive strategy in advance. Business conditions are tough, and competitors will do everything in their power to take business away from you. Research and make notes about current competitors. Look for the things they boast about, their unique values, their strengths and weaknesses.
Place them on a position map so you can see which competitors are strong on experience, which boast about technology or customer service, and what type of customers they have. Then work out where you want to be seen in comparison to them. What do you have to do or fix to get to that position? Look for new technologies and trends that could affect your industry.
Examine big international players operating in the same product space in other parts of the world, and keep an eye on their expansion plans. Update your product and customer strategies to cater for what you have found. This is actually easy; almost everything is available on the Internet. The hard part is making your company less vulnerable to competitors.
How Excellent Customer Service Affects Your Business’ Bottom Line
Business owners say great customer service is important. In fact, it’s so important it can make or break your bottom line. Here’s how to make it work for you.
Business owners say great customer service is important. In fact, it’s so important it can make or break your bottom line. Learning how this works will help you make improvements to your customer service that will bring more in to your business.
Why Customer Service Matters So Much
Bizness Apps says there are several reasons why your customer service matter so much, including:
- This is how your customers remember you. Having a positive reputation is great, but customers tend to remember negative customer interactions more. Research shows that you’ll need 12 positive experiences to make up for one bad one.
- Your customer service says a lot about your business. Customers often base the quality of your product on this interaction. This is why you should spend as much time and money on your customer service as you do on your products or services.
- Customers want to feel like you care about them. By playing to their emotions and treating them with genuine courtesy and respect, they’re far more likely to invest their faith in your business. Pause for just a moment to think about how they pay your bills and that should help you genuinely appreciate them.
- Good customer service honestly makes everyone’s lives easier. When it’s easy for your customers to contact you, it’s also easier for them to buy your products or services. This is why you should add contact forms and a FAQ page on your website and include customer service tools in your custom-built app. While offering other forms of contact are great, you don’t want to make it impossible to find your phone number.
- Offering great customer service is a profitable marketing strategy. Word-of-mouth marketing does more than most A+ marketing teams can. Start by getting your customers raving about your company’s customer satisfaction standards then include customer testimonials and happiness ratings to show potential customers how much you’re there for them. When you tap into this and have your customers start your praises of their own accord, you’re tapping into a gold mine.
- Don’t undervalue customer service because your clients always have alternatives available. It’s relatively easy for them to go to a competitor who’s offering them what you’re not. In fact, studies show that about 78% of consumers have backed out of transactions or failed to make an intended purchase simply because they received sub-par customer service. In today’s global marketplace, businesses that don’t have the tools to make it easier for their customers to do business with them get left behind.
- Maintaining your customer base will cost you significantly less money than you’ll spend trying to attract new customers. Loyal customers are typically worth as much as ten times more than their first purchase. However, you won’t cash in here if you don’t prioritise customer success. If you’re wondering what the value here is personally for your company, stop and consider the money, time, and other investments you place in onboarding new clients. You’re guaranteed to save in all these areas by having your clients stick around.
- While it’s important to drive traffic to your business, if you can’t transform this traffic into leads then the sales really aren’t much use. This requires a careful balancing act that you’ll grow better at as time goes on.
To Improve Your Customer Service, Choose the Right Phone System for you and Your Customers
Forbes says a cloud-based phone system helps with improving communication. In many cases this will help fix any problems you’ll experience in providing great customer service because now you can also provide over-the-internet support services. This is beneficial for your customers in several ways, including:
- Maintaining consistency in customer interactions and minimising the number of touch-points or different contacts that are involved in each customer’s interaction with your company will improve both their satisfaction and their loyalty because fewer transitions between customer service providers means there’s fewer opportunities for an error to occur. Not only is this something research shows, but the same research also shows that each touchpoint in your customer chain must be held accountable for the end result of your customer’s interaction with your business.
- You need to simplify and clarify any support text that’s on your website. If you can’t do this, they you should get rid of it altogether. These small changes can help your customers help themselves so they won’t send in as many support requests. If you choose to get rid of your support text altogether, make sure you instruct your customers to email you for help. This may make it easier for you to keep track of your customers’ issues so you make changes that eliminate them in the future.
- Listen to what’s being said about you on social media then respond appropriately. Every complaint or concern that’s raised online is an opportunity for you to win over additional customers while also solving your customer’s problem and increasing their satisfaction and loyalty.
- Show your customers that you always put them first by checking with them throughout the onboarding process. Sending an email or a handwritten note expressing your appreciation goes a long way.
Forbes continues on to say you never know when a complication with your product or service may arise. When it does you’ll want to work quickly to solve your customer’s problem. Even if they simply don’t understand how to use your product or service, it’s still up to you to fix this issue. Unfortunately, there isn’t always a simple solution available. Many times, you can fix it by offering exceptional over-the-phone or over-the-internet support though.
One Last Thing…
While you may feel like there’s a lot of information here to remember, Talkdesk says the most important thing to remember about this topic is it’s really hard to make up for a bad customer experience. Sure, we all make mistakes, but when it comes to customer support you really can’t afford to make them. Remember, it’ll take 12 good experiences for your business to make up for one lousy experience, which means you could lose out on a lot of money.
How You Can Over-Deliver To Gain The Advantage
Go over and above for the people you serve, and you will enjoy the benefits of an abundant relationship.
Wise, established entrepreneurs know that over-delivering value — which simply means going above and beyond for the people we serve to deliver more satisfaction for our service and thus exceed expectations — is crucial to a business’s survival, growth and future. It represents the core of a company’s foundation. And without a solid foundation, a business is always vulnerable to a person or company that does over-deliver.
To ensure you don’t ever forget the importance of over-delivering value, here are three ways it will give you and your company a distinct competitive advantage:
1. Creates abundance
Success comes most to those who are surrounded by people who want their success to continue. When you over-deliver value, people may be sceptical at first, thinking that you are expecting something in return, but when you are consistent and genuine with your intentions, they begin to trust and appreciate that you are just thinking of them.
You never know the value of the value you are delivering. But I’ve learnt that if you are consistently delivering greater value to people, your value becomes more and more aligned with the immediate needs of the people and companies you are serving — and abundance in the relationship is created. This is what over-delivering value is all about.
2. Earns respect
Entrepreneurs who take the time to over-deliver value are the ones who earn respect. Typically early-stage entrepreneurs tend to find ways to be the recipient of someone else’s value in a search for momentum.
You never know which transactional seed is going to grow, but when adding value to others, this type of seed is never forgotten.
For example, every quarter, I deliver a white paper to clients with the intention to challenge their thinking. My goal is for them to know that regardless of whether I am conducting business with them or not, I am thinking of them and thus strengthening our long-term relationship. And since my white papers focus on predicting future leadership trends and business strategies, when a related topic arises in one of their strategy meetings, they don’t hesitate to call me to discuss an opportunity for us to engage.
3. Enables distinction
Entrepreneurs who add value to others create and sustain a distinction in the minds and hearts of those they are serving. After all, most people are simply doing what they’re told to do inside the box they are given. Entrepreneurs can’t afford to do that.
We are the originators, the innovators and the opportunity seekers. We live our lives constantly in search of ways to add value to make things better. We disrupt the status quo. We are not in the business of fixing the old ways of doing things. We create new ways of doing things. If entrepreneurs are technically the experts at adding value through our products, services and brands, why can’t we add value through the people we depend upon most for our success?
Over-delivering value is the key not only to being a successful entrepreneur but also to the entrepreneurial mindset we must continually cultivate in ourselves and others. No one is successful alone. We must see the value in over-delivering value by being other-directed and connecting dots of opportunity with focus and purpose to become smarter and wiser, while making ourselves invaluable to the people and businesses we serve.