Learning ObjectivesThe objectives of this chapter are:To demonstrate the importance of customer-

supplier relationships to achieving total quality;To identify the principles and practices of quality

customer-supplier relationships;To give examples of effective partnerships between

customers and suppliers; andTo compare the TQ approach to customer and

suppliers to conventional organizational theories.

Customer-Supplier Relationship and Total Quality

Company- a customer to its supplier and a supplier to its

customer, - must focus on both their immediate

customers and those next in the chain

Your customer’s customer are, in a sense, your customers as well

Developing partnerships - customer and supplier can build

relationships that will help them along the customer- supplier chain

The Importance of Customer

As a buyer to increase profitability, As an active partner and the focus of all quality

activitiesCustomer who are merely satisfied may often

purchase from competitors because of convenience, promotions, or other factors

Loyal customers often go out of their way or pay a premium to stay with the company

Loyal customers spend more, pay higher prices, refer new clients, and are less costly to do business with

The Importance of Customer (Con’t)Poor-quality product and services, lead to

customer dissatisfaction in the form of complaints, returns, and unfavorable word-of-mouth publicity

Customers are five times more likely to switch because of perceived service problems than for price concerns or product quality issues (based on a study)

Dissatisfied customer tell at least twice as many friends about bad experiences than they tell about good ones

“The Customer Comes First” is a guiding principleFocus on customers, rather than internal issues, is

the foundation of the TQ approach to management

The Importance of SupplierSuppliers - provide the organization with goods and

services that help them satisfy the needs of their own customers

The final product cannot be any better than the parts that comprise it

If a supplier’s performance is of consistently high quality, its customer can decrease or eliminate costly incoming inspections that add no value to the product

Many organizations have increasingly demanded tangible progress in quality from all their suppliers

Suppliers provide training, software, or other goods or services that do not physically become part of the final product; they will influence its quality nevertheless by shaping the quality of the processes used to produce it

The Importance of Supplier (Con’t.)

Suppliers play a vital role throughout the product development process, from design through distribution

Suppliers can provide technology or production processes not internally available , early design advice and increased capacity which result in;

Lower costFaster time-to-marketImproves quality for their customer

Suppliers are viewed as partners with customers, because there usually is a co-dependent relationship

3 principles describe CSRs under total quality:1st :Recognition of the strategic importance of

customers and suppliers2nd :Development of win-win relationships

between customers and suppliers3rd :Establishing relationships based on trust

1st Principle Every organization must recognize that its

customers and suppliers are absolutely crucial to its success.

Many organizations seem to be driven by the need to observe standard operating procedures and maintain rigid boundaries between jobs, rather than trying to meet customer expectations.

1st Principle (Con’t)Customers must be at the center of the

organizational universe.Satisfying their need leads to repeat business

and positive referrals.Suppliers must also be considered crucial to

organizational success since they make it possible to create customer satisfaction.

2nd PrincipleDevelop mutually beneficial relationships

between customers and suppliers.The goal of building partnerships with

customers and suppliers must be satisfied if productive long-term relationships are to be created.

A teamwork relationship results in the need of fewer suppliers, with many items being single-sourced.

2nd Principle (Con’t)With fewer suppliers, companies do not have

to rely on annual bidding, and can award longer-term contracts.

3rd PrincipleSuppliers often incur substantial costs in

terms of both money and time due to multiple levels of review and inspection.

A certain level of rigidity is to be expected in the acquisition of weapons.

It is harder to understand when applied to more ordinary items.

3rd Principle (Con’t)Many Japanese firms do not inspect items

purchased from other companies in JapanHowever, they often inspect those purchased

from America.Trust depends upon trustworthy behavior by

both parties in a CSR.

Practices for Dealing with CustomersTo collect information constantly on customer

expectationsTo disseminate this information widely within

the organizationTo use this information to design, produce,

and deliver the organization’s products and services.

Collect Customer InformationAcquiring customer information is critical

to understanding customer needs and identifying opportunities for improvement.

Hideo Suguira – Executive vice president of Honda.

“We should not try to sell things just because the market is there, but rather we should seek to create a new market by accurately understanding the potential needs of customers and society.”

Collect Customer Information (Con’t)In chapter 1, we cited the model of customer

requirements:DissatisfiersSatisfiersExciters/delighters

Collect Customer Information (Con’t)In trying to understand customer needs, it is

important to go beyond what customers say they need to anticipate what will really excite them.

Customers will seldom express enthusiasm for a product that is different from anything they have experienced.

Collect Customer Information (Con’t)Some of the most popular ways to collect

information about customers are surveys, service evaluation cards, focus groups, and listening to what customers say during business transactions.

Getting employees involved in collecting customer information improves worker skills and learning, makes work more meaningful, and enhances motivation.

Collect Customer Information (Con’t)Having top managers of the company act as

customers of their own organizations is another way to better understand customer needs.

A newer approach to collecting customer information is to monitor the Internet.

Internet is offering companies a fertile arena for finding out what consumers think of their products.

Collect Customer Information (Con’t)Internet can be a good source of information

about competitor’s products.The cost of monitoring Internet conversations

is minimal compared to the costs of other types of survey approaches, and customers are not biased by any questions that may be asked.

Collect Customer Information (Con’t)A simple approach is to ask them directly,

using a process called the voice of the customer.

Collect Customer Information (Con’t)A more formal approach to getting into

customers’ minds is called imprint analysis.“Imprint” refers to the collection of

associations and emotions unconsciously linked to a word, concept, or experience.

The stronger the emotion, the stronger the imprint.

Collect Customer Information (Con’t)By looking deeply into people’s past

experiences, imprint analysis can help companies understand what drives today’s behavior.

Imprints of current experiences reveal emerging needs; thus, imprint analysis can actually forecast customer behavior.

Disseminating Customer Information

After people in the organization have gathered information about customer needs, the next step is to broadcast this information within the organization.

If the people in the firm are going to work as a team to meet customer expectations, they must all be “singing from the same hymnbook”.

Information does little good if it stays with the person or department that brought it to the organization.

Use Customer Information

Customer information is worthless unless it is used.

Customer feedback should be integrated into continuous improvement activities.

The Customer-Driven Quality Cycle

Customer needs and expectations(expected quality)

Identification of customer needs

Translation into product/service specifications

(design quality)

Output(actual quality)

Customer perceptions(perceived quality)

Feed

back

Managing Customer Relationships

A company builds customer loyalty by developing trust and effectively managing the interactions and relationships with customers through customer contact employees.

Truly excellent companies foster close and total relationships with customers.

In services, customer satisfaction or dissatisfaction takes place during moments of truth- every instance in which a customer comes in contact with an employee of the company.

Service standards are measurable performance levels or expectations that define the quality of customer contact.

Companies need to communicate and continually reinforce their service standards. A company should implement a process for tracking adherence to the standards and providing feedback to employees to improve their performance.

Managing Customer Relationships Cont’d.

Managing Customer Relationships Cont’d.

Complaints can adversely affect business if not dealt with effectively.

Many customers do not complain because they feel it wouldn't do any good or they are uncomfortable with the process.

World-class organizations make it easy for customers to complain by providing toll-free telephone numbers and soliciting complaints.

Effective resolution of complaints increases customer loyalty and retention.

Individual departments and key cross-functional processes within a company have internal customers who contribute to the company’s mission and depend on the department’s or function’s products or services to ultimately serve customers and external customers.

The linkages among internal customers build up the “chain of customers and suppliers” throughout the company that connect every individual and function to the external customers and consumers

Don't Ignore Internal Customers Cont’d.

Practices for Dealing with Suppliers Cont’d.Strong customer/supplier relationships are based on three guiding principles:1. Recognizing the strategic importance of suppliers in accomplishing business objectives, particularly minimizing the total cost of ownership.2.Developing win-win relationships through

partnerships rather than as adversaries.3. Establishing trust through openness and

honesty, thus leading to mutual advantages.

Practices for Dealing with Suppliers:

1. Base Purchasing on Quality and Cost2. Reduce the Number of Suppliers3. Establish Long-Term Contracts4. Measure and Certify Supplier Performance5. Develop Cooperative Relationships and

Strategic Alliances.

Base Purchasing Decisions on Quality and Cost

The first and most obvious practice is that purchasing decisions should be based on the quality of the product and not just its cost.

Purchasing personnel have traditionally been rewarded primarily for negotiating low prices, and thus this has been their focus.

Supplier firms have often responded to this situation in an obvious way: by doing whatever they need to do (including sacrificing quality) to maintain low cost.

Base Purchasing Decisions on Quality and Cost Cont’d.Two problems with the approach:1. Low purchase cost often does not equal

low overall cost. (ex. high warranty costs)2. Pressing suppliers for ever-lower prices

will minimize their profits.

Reduce the Number of Suppliers

Firms pursuing Total Quality are also reducing the number of suppliers they work with to the point of having only one supplier for some components.

As it increases the dependence of the organization on the supplier, thus weakening its bargaining position and exposing it to the possibility of an interruption in supply in the case of a labor stoppage or similar problem with the supplier.

Reduce the Number of Suppliers Cont’d.

Advantages in reducing the number of suppliers:

• Administrative costs are greatly reduced.• Cutting the number of suppliers reduces the

variability of in the incoming products.Why organizations continue to reduce its number of suppliers:The type of intensive CSRs that characterize cannot be maintained with a large number of suppliers .The significance of partners is lost if you have too many suppliers.

Establish Long-Term ContractsRelated to the idea of fewer suppliers is the practice of establishing long-term contracts with suppliers.Establishing long-term contracts allows suppliers to make greater commitments to improving the quality of products and provides greater opportunity for joint improvement efforts and the development of teamwork across organizational boundaries.

Measure and Certify Supplier Performance

Supplier certification is used by many companies as the focal point of their supplier management system. Formal programs typically are established to rate and certify suppliers who provide quality materials in a cost-effective and timely manner.

Develop Cooperative Relationships and Strategic AlliancesIncreasingly, suppliers are viewed as partners with customers, because there usually is a codependent relationship. Thus, the cornerstone of TQ-style customer-supplier relationships is cooperation.Some forms of customer-supplier cooperation:Early involvement of suppliers in the design of new products.The effort of customers to help suppliers improve quality. (ex. Quality improvement seminars; Joint quality planning between customers and suppliers - Juran)

Develop Cooperative Relationships and Strategic Alliances Cont’d.Today, suppliers are being asked to take on greater responsibilities to help their customers. As companies focus more on their core competencies- the things they do best- they are looking outside their organizations for assistance with noncritical support processes. Customer-supplier partnerships represent an important strategic alliance in achieving excellence and business success.

Benefits of customer-supplier partnerships cont’d.Benefits of customer-supplier partnerships:1. Access to technology or distribution channels

not available internally.2. Shared risk in new investments and product

development.3. Improved products through early design

recommendations based on supplier capabilities.

4. Reduced operations costs due through better communications.

Quality Customer – Supplier Relationships in Action

In nine years D.J. went from being one of 100 G.E. suppliers of plastic parts to being its sole source.D.J. improve its quality by taking advantage of G.E.’s supplier seminars in statistical process control (SPC).Early involvement in product design is commonplace for these two companies. In one typical case D.J. recommended a minor change in product design that reduced the cost of a part by more than 5 percent and increased its expected life by 16 percent.This example typifies the advantages enjoyed by companies with quality customer-supplier relationships.

Customer – Supplier Relations in Organization Theory

Much of the organization literature has argued that firms should consider customers as partners for success. As far back in 1973, Gersuny and Rosengren argued that diverse customer roles require new bonds of interdependence and an increasingly complex social network that crosses traditional organizational boundaries.

They identified four distinct roles for customers:1. Resource2. Worker (or coworker)3. Buyer4. Beneficiary (or user)

Customer – Supplier Relations in Organization Theory cont’d.

A fifth role has emerged from work in human service area: cutomers can be a key outcome, or product, of value-creating transformation activites, such as education and health delivery.

The first two roles, customers act as inputs.The last three act, scutomers act as outputs.Each role is instumental in creating competitive

quality within a firm.

Customer – Supplier Relations in Organization Theory cont’d.

Lengnick-Hall suggests that the following organizational practices are related to the competitive quality of production processes and outcomes:i. Practices that deliberately select and carefully manage

cutomer resources, foster an effective alliance between the firm and its customer resources, and improve the quality of its customer resources.

ii. Practices that provide clear opportunities for coproduction, enhance customer abilities as coproducers, and increase customer motivation toward coproduction.

iii. Activities that foster trust, develop interdependence, share information, and initiate friendly, mutually beneficial customer-organization bonds.

Customer – Supplier Relations in Organization Theory cont’d.

iv. Activities that foster unambiguous communication with users, focus on meeting customer needs, offer realistic previews, achieve dimensions of quality that customer s truly are about, and ensure that actual use is consistent with intended us.

v. Activities that create opportunities for direct communication and interaction between users and production/ core service personnel.

The resource dependence Perspective (RDP)

Developed by Jeffrey Pfeffer and Gerald Salancik.An organizational theory that is most comparable

to TQ view of customer-relations.A perspective that deals with how organizations

manage to get the resources they need from their environment.

Between the two perspectives is the similarity on mutual emphasis on the idea that the sources of an organization’s success lie outside its boundaries.

Pfeffer and Salancik point out that much organization theory focuses on internal operations of organizations, giving less emphasis to the organization.

The resource dependence Perspective (RDP) cont’d.

Current writers give only token consideration to the environmental context of organizations. The environment is there somewhere outside the organization, and the idea is mentioned that environment affect or constrain organizations. After this, the task if management is considered. Somehow the things to be managed are ussually within the organization, assumed to be under its control and often have to do with low-level hired personnel.

When authors get down to the task if describing the running of the organization, the relevance of environment fades.

The resource dependence Perspective (RDP) cont’d.

According to RDP, the effectiveness of an organization should be understood in terms of how well it meets the demands of external groups and organizations that are concerned with its actions and product.

TQ has traditionally focused on the customers, those who purchase the organizations products. The RDP however recognizes that organizations must satisfy the demands of not only customer but also other entities in the environment including various government agencies, interest groups, share holders, and society as a whole.

The resource dependence Perspective (RDP) cont’d.

Government agencies, a government regulatory agency can make life miserable for an organization it does believe is not following government regulations. In extreme case the government can even shut them down.

Interest Groups can influence customers to boycott a product for reasons unrelated to quality of product itself.

Shareholders of public corporations have become a constituency to be reckoned with. They are making increasing demands on how corporations operate.

From this perspective it is clear that although customers are important, other organizations and groups other than customer can play a major role.

The resource dependence Perspective (RDP) cont’d.

The first would be to enlarge the concept of customers to include all those who have a stake in organization.

Second is for TQ advocates to recognize that although providing quality to customers is the overriding focus of an organization’s activities, satisfying customers alone will not guarantee continued success, due to potential influences of other constituencies.

This perspective has been incorporated into the Baldridge award criteria through its core value of Public Responsibility and Citizenship.

The resource dependence Perspective (RDP) cont’d.

Another similarity between TQ and RDP is their recognition of interdependence between organizations as a fact of organizatonal life that must be managed effectively.

RDP shares with TQ the idea that managing interdependencies with other organizations is a key to success.

Integrative BargainingThe idea of building cooperative relationships that benefit

both parties to a negotiation is not something that was created by writers or practitioners of TQ. The idea of mutually beneficial relationships and win-win bargaining comes from a long tradition of research and writing on conflict management and negotiation.

The idea behind this research tradition is that both parties will benefit more in the long run if they work together to help each other, rather than each one striving to win each round of negotiation.

This tradition has been appropriated by writers on TQ, because it is consistent with the idea of customer orientation and teamwork.

Integrative Bargaining cont’d.

The key ideas of integrative bargaining (or principled negotiation) are:

1.Separate the people from the problem

2.Focus on interest, not positions

3.Invent options for mutual gain

4.Insist on using objective criteria