How often have we heard clients say “customer satisfaction comes before everything”? Every time we hear it, we have mixed reactions: on the one hand, the client is absolutely right – dissatisfied customers are the quickest way to kill your business. On the other hand, however, we wonder at what cost to the organisation must customer satisfaction be delivered?

Let me try to explain: the key to a profitable business lies in delivering what the customer wants, when he/she wants it, at a fair price to all….but NOT if the process of this delivery is flawed internally. This is the route to profit erosion, unexplained costs and eventually loss-making sales.

Let’s take an example: a recent client was in the business of making components critical to the mining industry, but was not adept at quality control during the manufacturing process. Mining houses would buy their products and use them in batches of 12-24 at a time, but would keep stock for an average of two months. When the mining houses used the products, they found that, of a batch of 24, on average 6-7 would fail, resulting in stoppages, frustration and return of goods for free replacement.

Our client duly replaced the products and took the loss of revenue on the chin, factoring it into their forward planning as a normal cost of doing business….which is where the problems started.

We refer to these costs as Cost of Quality, i.e. how much money do I spend to deliver the quality my customer stipulates: in this case, the lost revenue could be clearly labelled as a Failure Cost – unnecessary and caused purely by incompetence during the production process. Failure Costs can, however, get really big really quickly – let’s remember that any returned product has to be either scrapped or reworked (a cost), there may be warranties to honour (a cost), the customer may demand compensation for downtime (a big cost), and you will almost certainly have to sweeten subsequent sales to keep the customer happy (more cost).

But here’s the really worrying bit…..the client in question wasn’t even measuring these costs. Hence, they didn’t know they had a problem. Hence they were doing nothing about it….and wondering why their profits were sitting about 30% below expectation based on revenue.

Moral number 1:

• We don’t know what we don’t know
• We can’t act on what we don’t know
• We won’t know until we search
• We won’t search for what we don’t question
• We don’t question what we don’t measure
• Hence, we just don’t know

Next Post: what NOT to do when you discover high failure costs