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ASSIGNMENT OF SERVICE OPERATIONS MANAGEMENT

Summary of Research Article:

Zero Defections: Quality Comes to Services

Submitted To,
Prof. A.K. Dey

Submitted By:
Ashwani Kumar (16DM050)
Rohit Sinha (16DM181)
Sayantan Das (16DM201)
Zero Defections: Quality Comes to Services
In recent years, few service companies have been able to satisfy their customers and now
the companies are beginning to understand that quality doesnt improve unless it is
measured. The most profitable way to run business is to improve quality by reducing defects
and not just by lowering cost. To achieve this, companies made ZERO DEFECTS their guiding
light.

Service companies have their own kind of scrap heaps and these are customers not coming
back. This also has a cost and there is a need to reduce it. They strive for zero defection,
keeping every customer the company can profitably serve.

Customer defections have a larger impact on companys profit than any other factor
(market share, unit cost etc.). As a customers relation with the company lengthens, profits
tend to increase. By retaining just 5% of customers, the profit increases by 100%.

DEFECTING CUSTOMERS SEND A CLEAR SIGNAL: PROFIT SLUMP AHEAD.

Defecting customers and Defection rates not only indicate the profit but also direct the
managers attention to the specific things that lead to defection. And the only way to
prevent it is by outperforming competitor in terms of quality of the services they provide.

By taking feedback from the defectors, companies can reduce the weaknesses and
strengthen them before profits starts to come. Thus, defection analysis acts as a guide that
helps companies manage continuous improvement.

Charles Cawley, president of MBNA America, a Delaware based credit card company, knows
well how customer defections can focus a companys attention on exactly the things
customers value. One day Cawley announced his determination to satisfy and keep each
and every customer and so the employees were asked to gather feedback from defecting
customers and to act upon the information, adjusting product and process regularly.

As the quality improved, fewer defections were encountered. Only 5% customers left each
year- half the average rate in the industry. MBNAs industry ranking went up from 38 to 4
and the profit increased sixteen times.

THE COST OF LOSING A CUSTOMER

If companies knew the cost of losing a customer, they would be able to make accurate
evaluations of investments designed to retain customers. If served properly, customers
generate increasingly more profits each year they stay with the company. The longer a
company keeps a customer, the more money it makes. When customers defect, they take
all the profit-making potential with them.
Acquiring new customers entails certain one-time cost. For e.g., in credit cards, companies
spend an average $51 to recruit a new customer and set up a new account. This new
customer uses the credit card less at first and generates a base profit but if the customer
stays for another year they gets accustomed to using it. As a result of this he economies
improves increasing the profits.

As purchase rises, operating cost declines and the company gains experience with its
customers. They can now serve their customers efficiently by using their preference and
expenditure history. The customers also know what to expect from the company.

Also, companies with long-time customers can charge more for their products or services as
most people would pay more to use the services they know than to take chance with a
cheaper one. These long-time customers also do free advertising by talking about the
service over the years and drum up a lot of business.

One of the U.S. based home builder found that more than 60% of its sales are result of
referrals.

Customers who defect to the competition can tell you exactly what parts of the business
you must improve.

DEFECTION MANAGEMENT

Service companies probably cant and shouldnt try to eliminate all its defections, instead
they can and must reduce them. The organization should be prepared to spot customers
who leave and also to analyse and act on the information they provide.

Watch the door: Managing zero defections requires mechanisms to find customers who
have ended their relationship with the company or are about to end it. This can be managed
through Information Technology. Using I.T. the company should also gather information
about their customers regularly.

Sometimes, defining a defection takes some work. In the railroad business, for example,
few customers stop using the services completely, but a customer that shifts 80% of its
shipments to trucks should not be considered retained. The key is to identify the customer
behaviours that both drives companys economics and gauge customer loyalty.

For some businesses, the task of spotting defects is challenging even if they are well defined
because customers tend to be faceless and nameless to the company (Retailing). They
should find ways to know their customers.

One reason to find customer who are leaving is to try to win them back but this is not
successful half of the time. The more important motive for finding defectors is for the
insight they provide. Feedback from defecting customers tend to be concrete and specific
which could help the companies in continuous improvement
THE ZERO DEFECTIONS CULTURE

Everyone in the organization must understand that zero defections is the goal. It is
important to make all employees understand the lifetime value of a customer. Mastercare
has redesigned its employee training to emphasize the importance of keeping customers.
For example, many customers who stopped doing business with Mastercare mentioned that
they didnt like being pressured into repairs they had not planned on. So Mastercare now
trains store managers to identify and solve the customers problem rather than to maximize
sales. Videos and role-playing dramatize these different definitions of good service.
Employees have responded enthusiastically, and 25% more customers say they intend to
return.

Training should teach employees the specifics of defections analysis, like how to gather the
information, whom to pass it on to, and what actions to take in response. Employees will be
more motivated if incentives are tied to defection rates. MBNA, for example, has
determined for each department the one or two things that have the biggest impact on
keeping customers.

Having everyone in the company work toward keeping customers and basing rewards on
how well they do creates a positive company atmosphere. Encouraging employees to solve
customer problems and eliminate the source of complaints allows them to be nice, and
customers treat them better in return.

Trying to retain all of your profitable customers is elementary. Managing toward zero
defections is revolutionary. It requires careful definition of defection, information systems
that can measure results over time in comparison with competitors, and a clear
understanding of the microeconomics of defection.

Ultimately, defections should be a key performance measure for senior management and a
fundamental component of incentive systems. Managers should know the companys
defection rate, what happens to profits when the rate moves up or down, and why
defections occur. They should make sure the entire organization understands the
importance of keeping customers and encourage employees to pursue zero defections by
tying incentives, planning, and budgeting to defection targets. Most important, managers
should use defections as a vehicle for continuously improving the quality and value of the
services they provide to customers.

Just as the quality revolution in manufacturing had a profound impact on the


competitiveness of companies, the quality revolution in services will create a new set of
winners and losers. The winners will be those who lead the way in managing toward zero
defections.