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A quality grid approach to evaluating service contract performance.

The definition and measurement of service quality has presented problems for both purchasers and suppliers of service. Newman|1~, in defining physical product quality, states that quality is "the adherence to specifications" where specifications are "the technical communicators between the designer and the product." Purchasing managers can manage service quality effectively by applying the same definition of quality to the service product. Furthermore, purchasing managers can define service contract specifications more clearly by identifying the critical elements of quality service.

The Service Quality Grid System developed in this article combines a quantitative and graphical approach to evaluating and controlling the quality of services purchased and provided. Using a quantitative approach to the major elements of service quality--response time, technical proficiency, and cost--the Grid System allows managers to easily determine whether service contractors are meeting quality standards. Moreover, the Grid System provides managers with a graphical comparison of the quality provided by contractors as well as an early warning of deterioration of quality.|2~

The next section describes a Service Quality Grid System designed to serve as a tool for managing service quality. The following section identifies the major elements of service quality and explains how they can be measured. The next section presents an example of how the Service Quality Grid System can be applied. The final section summarizes the strengths and variety of uses of the Grid System.

The Service Quality Grid System

The Service Quality Grid System is a tool which allows procurement managers to use the response, technical, and cost elements of service quality to monitor and control service quality. The Service Quality Grid System is comprised of two grids--the Service Quality Grid and the Cost of Quality Grid. These grids provide a means of evaluating the degree to which service quality performance meets service quality policy standards as well as provide a measure of service quality cost efficiency.

Service Quality Performance Grid. The Service Quality Performance Grid combines response and technical elements to determine a "Service Quality Performance", or QP, classification. Each QP classification is represented by a quadrant of the grid.

For example, the upper right quadrant represents combinations of response and technical elements that signify that service performance is meeting quality standards set by procurement policy. Contractors meeting these policy standards in both the response and technical areas would fall into this quadrant and be classified as QP1 (Quality Performance One) contractors. Contractors meeting response quality standards but with substandard performance in the technical area would be located in the upper-left (QP2) quadrant. Contractors meeting technical quality standards but with substandard performance in the response area would be located in the lower-right (QP3) quadrant. Contractors performing on a substandard basis in both the response and technical areas would be located in the lower-left (QP4) area.

Service Quality Cost Grid. The Cost of Service Quality Grid combines a composite service quality element with the service cost element to determine a "Service Quality Cost", or "QC", classification. The composite quality element is a composite of the response and technical elements. This grid is also segmented into quadrants to designate the degree to which the service contractor is delivering an overall quality service product and pricing it reasonably.

The upper right quadrant represents contractors which are providing a composite service product meeting policy standards and also providing a composite service product meeting policy standards and also providing it at or lower than the cost standard established by procurement policy for a particular type of service. These contractors would be designated as QC1 contractors. QC2 contractors in the upper left quadrant are pricing their product reasonably but not delivering a quality service product. QC3 contractors in the lower right quadrant are providing a quality service product but are pricing their product at a level exceeding the policy standard. QC4 contractors in the lower left quadrant are providing an inferior service product at an unreasonably high price.

Service Quality Elements

Purchasing managers can have a significant influence on the design specifications of a service product.|3~ During negotiations with service contractors, purchasing managers can develop clear design, or quality, contract specifications. The quality specifications establish measurable benchmarks against which service performance is measured.|4~

There are three major measurable elements in evaluating the quality of service contract performance--response time, technical proficiency, and cost. The response element relates to the elapsed time between the service request and the service delivery. The technical element addresses the proficiency with which the service is delivered.|5~ The response and technical elements are combined to provide a composite service quality element. The third major element is the cost of the service product.

Response Element. This element measures the degree to which the firm's service contractor responds to a service request according to the service contract's response specifications. For example, assume that a specific contract calls for the contractor to provide service within six hours of a request. If the contractor responds to a service request within this time period, then, as agreed upon by both purchaser and supplier, the purchaser is getting quality service with respect to the response element.

Service response quality is measurable because it is possible to record both the service request time and service contractor arrival time. Therefore, purchase managers can calculate a "response rating" as the percentage of service calls which do not meet the service contract's response time specification. For example, assume a service contractor meets the response time specification of six hours on forty-five out of fifty service calls, or ninety percent of all service calls over a one year period. The response rating for the contractor is ninety.

Technical Element. This element measures the degree to which the contractor delivers service in a technically correct manner. Technical quality means that the contractor provides service using the correct techniques and materials. Purchasing managers can measure technical quality as the percentage of service calls which require a "callback" for service (within a reasonable period) for the same problem.

A technical rating can be calculated in the same manner as the response rating described above. For example, assume that the service contract calls for the contractor to perform successfully on the first service call with no "callbacks" for the same problem within ten days. ff no "callbacks" occur on forty of fifty service calls during the one year period, or eighty percent of all service calls, the technical rating for that contractor is eighty.

Composite Service Quality Rating. The composite service quality rating is a weighted-average composite of the response and technical ratings. Service procurement policy sets the weights used to calculate the composite service quality rating. The weights indicate the relative importance of the response and technical elements in management's view of service quality. If the procurement policy quality standards give equal weight to the technical and response elements of service quality, a weight of .50 is used for each rating (response and technical) in the composite service quality rating. Management, however, could change the relative importance of each element in the composite measure by altering the weights assigned to each element.

Cost Element. The element measures the degree to which the average cost per call on a contract is conforming to benchmark costs established through the company's procurement policy. Procurement managers can establish benchmark costs from regional data on cost components such as labor, materials, and fuel. Review of the contract specifications with the accounting area will help the purchasing manager in assigning actual costs for each contract on a per-call basis.

Policy Normalization of Ratings

A proactive procurement policy will define minimum performance standards for service contracts of various types. For example, contracts to service "Noncritical" equipment might warrant a response rating of ninety. This rating means that the contractor must meet contract response specifications at least ninety percent of the time. Contracts to service "Critical" equipment might warrant a minimum response rating of ninety-eight.

Different minimum performance standards for various types of contracts may lead to misleading interpretation of individual contractor quality measurements. Quality ratings, however, can be standardized across all contracts even if the contracts have different minimum quality standards. This is accomplished through a simple process of policy-normalization as explained in the following example.

Assume service is being provided to Steel Corp. through two service contracts. One contract is for the service of beverage dispensing equipment in the company's cafeteria and is classified as a "Noncritical" contract. The second contract is for the service of its numerical-control computer that monitors and controls the temperature of a series of furnaces in the factory. Since this function is extremely critical to the production process, the contract is classified as "Critical".

Figure 2 contains the procurement policy standards of Steel Corp. in the area of service quality, and Figure 3 shows the service contract specifications for Steel Corp.'s two service contracts.

Assume that, during the past year, the firm servicing the "noncritical" beverage dispensing equipment has responded to a service request within twelve hours (that is, has met the contract specifications regarding response time) on sixty percent of the calls, had no call backs for repeat service within ten days on ninety-eight percent of the calls, and had an average billing of $120 per call. The firm servicing the "critical" computer has responded to a service request within four hours on ninety-six percent of the calls, had no call backs for repeat service within twenty days on one hundred percent of the calls, and had an average billing of $180 per call.
Procurement Policy Standards - Steel Corp.
Service quality is meeting procurement policy performance
standards if a contractor has the following minimum technical
and response ratings:
Non-critical Contracts Response rating: 85
 Technical rating: 90
Critical Contracts Response rating: 85
 Technical rating: 95


Table 1 illustrates the process by which the three element ratings and the composite service quality rating for each contractor can be normalized (standardized) across contracts using Steel Corp.'s procurement policy standards. Policy-normalization is accomplished for the response and technical elements by simply dividing the contractor's rating by the appropriate policy standard for that element and contract type.

For example, the normalized response rating of 0.71 for the "non-critical" contractor is calculated by dividing the response rating of 60 by the policy standard of 85. The normalized response rating of 0.71 for this contractor means that its actual response rating is only 71 percent of the rating standard set by procurement policy.

The normalized composite service quality rating is the weighted average of the normalized response and technical ratings. Weights are established by procurement policy. For Steel Corp., the response and technical elements are given equal weights.

The procedure to normalize the cost element is slightly different because lower costs are preferred over higher costs. To maintain the convention within the Grid System of higher ratings being preferred over lower ratings, normalized service costs are determined by first calculating the difference between the average cost on a contract and the cost policy standard (actual - standard). This difference is then divided by the policy standard and the result is subtracted by 1.00.

TABULAR DATA OMITTED

For Steel Corp.'s "noncritical" contractor, the normalized cost is calculated by first dividing the difference between the actual cost and policy cost standard ($120 - $100) by the policy standard cost of $100 resulting in 0.20. In effect, the actual cost is 20 percent above the policy standard. The result of 0.20 is then subtracted from 1.00 to determine the normalized cost rating of 0.80. Since this normalized rating is less than one, it indicates the average cost for this contractor is not meeting the policy cost benchmark.

For Steel Corp.'s "critical" contractor, the normalized cost is calculating by first dividing the difference between the actual and policy standard costs ($180 - $200) by the policy standard of $200. The result of -0.10 is subtracted from 1.00 (1.00 - -0.10) to give a normalized cost rating of 1.10. This indicates that the average cost of $180 for this contractor is "better" than the policy standard of $200 by 10 percent.

Normalizing costs in this way allows the rating convention of higher performance and lower ratings indicating lower performance to be maintained.

Steel Corp's Grid

Figure 4 shows the Service Quality Grid System for Steel Corp. using policy-normalized quality ratings. The contractor servicing Steel Corp.'s "noncritical" equipment had normalized response and technical ratings of .71 and 1.09, respectively. This shows that the contractor is not meeting response quality standards but is meeting quality standards in the technical area. This contractor would be classified as a QP3 contractor and is designated on the Service Performance Quality Grid as "NC".

In contrast, the contractor servicing Steel Corp.'s "critical" computer equipment had normalized response and technical ratings of 1.07 and 1.05, respectively. This shows that the contractor is exceeding both response and technical standards and would be classified as a QP1 contractor. This contractor is designated on the Service Performance Quality Grid as "C".

The QP classifications of service contractors facilitate the evaluation and monitoring of service quality. Steel Corp.'s purchasing manager immediately knows that the QP1 contractor is meeting or exceeding service quality standards and that no action is required. However, the QP3 contractor is meeting only Steel Corp.'s technical quality standards but falling short in responding to service requests according to policy standards.

The QP3 classification allows the purchasing manager to immediately focus on the problem and potential remedies. The sub-standard response rating might be a result of insufficient resources being allocated on the part of the service contractor to Steel Corp. It may also be a result of poor territory layout or inadequate dispatch communications systems resulting in more travel time per technician than would be required with a more efficient territory design or better equipment. The purchasing manager could use the Grid System to make this point known to the contractor and therefore pro-actively improve the quality of service received.

A service contractor classified as QP2 would immediately be recognized as one which is meeting response quality standards but not meeting technical proficiency standards. A possible prescription of additional training for the contractor's personnel may be appropriate.

A service contractor classified as QP4 would indicate substandard response and technical quality. The purchasing manager would consider these contractors of highest priority in addressing service quality problems especially for "critical" contracts.

On Steel Corp.'s Service Quality Cost Grid, the contractors' composite service quality rating is combined with their cost rating. Since Steel Corp. is giving equal weight to the response and technical elements, weights of 0.50 and 0.50 axe used to determine the composite rating.

A contractor classified as QC2 would indicate that the service provided is not meeting overall quality standards yet is priced to at least meet the policy cost benchmark. This classification would indicate to the purchasing manager to focus on the quality performance problems rather than cost problems.

A contractor classified as QC3 would indicate that the service product being provided is meeting composite quality standards but at a cost which exceeds the policy benchmark. The purchasing manager may require the contractor to justify the higher price of the service product.

Purchasing managers can use the Service Quality Grid System in several ways. They can use the Grid System on a cross-sectional basis to analyze and compare the performance of groups of service contractors. In addition, purchasing managers can use a dynamic approach in which the performance of one or a group of contractors can be tracked over time on one Grid System. With either of these approaches, purchasing managers can analyze service contractor performance on an individual basis or aggregated on a contractor, territory, region, division, or corporate basis.

Summary

As the above example illustrates, the Service Quality Grid System is a practical, easy-to-use, yet powerful tool which allows managers to more pro-actively and effectively evaluate the quality of performance on service contracts. There are several real strengths to the system. First, the Grid System incorporates all of the critical, measurable elements which determine service quality. Purchasing managers no longer have to rely strictly on qualitative indicators of service quality. The integration of policy standards into the Grid System establishes clear boundaries to differentiate between above- and below-standard performance.

Second, the Grid System provides the flexibility to analyze service quality on a cross-sectional or dynamic basis. A cross-sectional analysis allows the purchasing manager to quickly assess whether an individual contractor is performing up to quality standards. In addition, the manager can evaluate the degree to which all service contractors are providing a quality service at a reasonable price and quickly identify those that are not. Using the Grid System dynamically, the manager can develop a Grid System for each contractor and show service performance over a period of time. In this way, the manager can evaluate whether service quality is improving or deteriorating for each contractor.

Third, the Grid System allows for aggregation of quality information so that ratings can be developed for a service contractor, territory region, division, or at the corporate level.

Fourth, the Grid System contractor classification scheme provides a consistent and easily identifiable characterization of service contractors. The classification will immediately identify the strengths and weaknesses of service contractors.

Fifth, the Grid System and resultant contractor classification will identify areas where service quality is substandard. This will allow the manager to quickly identify prescriptive measures, such as additional training, enhanced radio dispatching equipment, or increased service staff.

Sixth, the policy-normalization procedure used in the Grid System allows procurement policy changes to be quickly incorporated into the evaluation of service quality. If policy standards are raised in the area of service quality, the Grid System will immediately identify those contractors which are reclassified to reflect substandard service quality providers.

Seventh, the Grid System can be incorporated into a company-wide management information system so that managers at any level can view the appropriate Service Quality Grid System at the plant, division, region, or corporate level aggregation.

Finally, the Grid System can be used in a number of environments. Although the Steel Corp. example illustrated how a company can use the Grid System to evaluate and monitor services received, it is only one of several applications. The Grid System can be used to evaluate and monitor services provided in-house. It can be used to evaluate third-part contractors providing service to customers of its products. Furthermore, the Grid System can be used as a quality control tool by companies providing services.

Service Contract Specifications - Steel Corp.

Response Element

Non-critical Contracts - service performed within twelve hours of a service request.

Critical Contracts - service performed within four hours of a service request.

Technical Element

Non-Critical Contracts - service performed correctly on the first call with no call-backs for the same problem within ten days.

Critical Contracts - service performed correctly on the first call with no call-backs for the same problem within twenty days.

Cost Element

Beverage Dispensing Equip. - benchmark cost per call of $100.

Numerical Control Computer - benchmark cost per call of $200.

References

1. Richard G. Newman, "Insuring Quality: Purchasing's Role," Journal of Purchasing and Materials Management, Fall 1988. pp. 14-21. Also see Evert Gummesson, "Service Quality and Product Quality Combined," Review of Business, Winter 1988, pp. 14-19 for a justification for integrating quality thinking in both the service sector and the products sector.

2. See Glynn W. Mangold and Emin Babakus, "Monitoring Service Quality," Review of Business, Spring 1990, pp. 21-27 for a conceptual framework for monitoring service quality based on gaps in the delivery process.

3. Much has been written on the importance of the service recipient's participation in setting service quality standards. See Christian Gronroos, "Service Quality: The Six Criteria of Good Perceived Service Quality," Review of Business, Winter 1988, pp. 10-13, and Roger G. Langevin, "Service Quality: Essential Ingredients," Review of Business, Winter 1988, pp. 3-5.

4. For a treatment of the specification aspects of service contracts, see Donald W. Dobler, David N. Burt and Lamar Lee, Jr., "Purchasing and Materials Management" (New York: McGraw--Hill, 1989), Chapter 17 and David N. Burt, Warren E. Nordquist and Jimmy Anklasaria, "Zero Base Pricing" (Chicago: Probus Publishing, 1990), Chapter 5.

5. Other measurable elements of service quality would be degree of consistency in which the response and technical specifications of the contract are met and degree to which delivery (professional conduct, appearance) standards are met. The latter element could be measured on a binary (pass or fail) basis.

Dennis P. Zocco is Professor of Finance, Department of Finance, School of Business Administration, University of San Diego, San Diego, California.
COPYRIGHT 1993 St. John's University, College of Business Administration
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Zocco, Dennis P.
Publication:Review of Business
Date:Mar 22, 1993
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