1 Business Economics I Quality Assurance in Commercial Relations I

2 Plan of the topic 1. Introduction 2. What is Quality? 3. Why is Quality important? 4. Quality management in business 5. Quality management for different types of products 6. Quality assurance in NON-repetitive transactions 7. Quality assurance in Repeated transactions 8. Strategies for creating quality safeguarding mechanisms 9. Explicit Guarantees

3 Introduction Who are Caterpillar and what do they do? Why do combatants generally prefer the AK automatic rifle to the M16 one? What is more problematic – a friend who always comes late by 15 minutes or someone who comes once on time and once comes 45 minutes late? What is the problem of Mercedes Benz in the last couple of years?

4 What is Quality? Quality – all the characteristics that describe an object, a phenomenon or a relation. Important implication: Quality has many dimensions or, alternatively, products have many attributes of quality Examples: Colour, size, taste of the product Delivery time Expiration period

5 Why is Quality important? What happens if you buy a washing machine and the door of your home is not as wide as the washing machine? What would happen if there were no shoe or cloth sizes? If there is a traffic accident and a person is injured, what would you do? What does Total Quality Management mean?

6 Quality Management in business There are three major components in the quality policy of a company: The definition of quality Attributes and parameters The control of quality Ensuring that the defined quality is actually delivered The safeguards/the guarantee of quality Credible commitment to the promised quality

7 Definition of Quality I The supplier MUST define a standard level of quality, which is not necessary to be HIGH How to define it? Understand the attributes of the product both from technical perspective and from the customers’ point of view - market research What happened to many of the.com companies and high-tech communication?

8 Definition of Quality II Is it important to offer products of high quality? Is there a link between high qualities and profits? Is it important to offer products of standard quality? Hint – what would you prefer as postal service: One that delivers your mail sometimes for 2 days and sometimes for 5 or One that delivers your mail always for 4 days

9 Definition of Quality III The objective of the supplier is: To offer standard quality To offer quality that meets the expectations of the customer – How? Through communication from the supplier The knowledge of the customer about the products of the supplier Example: McDonalds Starbuck Café

10 Quality Control I Once the suppliers have defined quality, they have to ensure that the actual quality delivered corresponds to the promised definition. Example: Irish pub in Madrid Aspects of quality control – technology and organization? Technical aspect: sampling and tests for products surveys of customer satisfaction and inspections for services

11 Quality Control II Adapting the organization: TQM Why is quality control such an important issue in the competitive strategy of companies? Domino Pizza Skunks at 3M Coca-Cola

12 Safeguarding Quality How to offer safeguards that oblige the supplier to fulfil his promises? How to convince the clients that they will receive the promised quality? What should you do if you find a defect in a batch of product – discard it or still offer the products though at a lower price? And if you discover a defect years after the product has been on the market? Tylenol vs. Perrier

13 The importance of standard Quality Origins of standardization: industrial production Use of interchangeable parts Increase in specialization Standard quality and services: McDonald’s Citibank The Big Four Postal services

14 Quality management and type of products I Can you verify the quality of a shirt before buying it? And of a computer? And of a movie? What about surgical interventions? Implication: products differ in the degree of verifiability of the quality of their attributes before consumption (and sometimes even after consumption) safeguards are needed

15 Search goods Search goods are the products, whose quality can be verified before purchase or consumption Examples: Clothes Insurance Important: resources must be dedicated to produce information or to reduce the cost of information for the customers. However – competition can use this information too… Better use a total guarantee system that compensates the buyer for problems that are supplier’s fault

16 Experience goods Experience goods are products, whose quality can be verified only after consumption. Examples: Fridges Cars Restaurant food Haircuts Importance of delivering the promised quality and convincing customers

17 Credence goods Credence goods are product, whose quality can be verified in the very long run or NEVER. Examples: Car repairs Surgical operation VERY important to convince customers. Reputation and quality control systems Doctors and Medical associations McDonald’s - franchising

18 Problems for the different types of products Typical problemsFunctions of advertising Search goods To lower the information cost for customers Competition may benefit from customer education To inform on: Availability Price Product quality Experience goods How to convince customers that quality is the promised one To indicate that quality is high enough to buy again Credence goods A very serious problem of convincing customers of level of quality To indicate that quality is high enough to buy again Emphasis on the long run

19 Product attributes and Quality Good/ServiceSearch attributes Experience attributes Credence attributes Washing machine Decaffeinatedcoffee Housing