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Supplier service quality: a necessity in the 90's.

Service quality is becoming a necessity not only for success and growth, but also for survival, especially in the supply of firms in the petro-chemical industry. The difference between goods and services is eroding, as indicated by DeSouza (1989) and McKenna (1991), making service an integral part of the product. Service quality is not well defined, but includes delivery times, inventories on hand, conformance of product to specifications, administrative accuracy and "intangibles" such as specialized repair programs. Additional support for the need to add value to products using service is supplied by Williams and Smith (1990), who stated that the "product" may be a service in conjunction with an existing good, and the Reliance Electric case study by Singh (1990), which showed the importance of adding value to products through service. Arnold (1989) indicates that suppliers will have to meet the customer's needs at the lowest cost, and that cost and quality are not in conflict. Weber et al. (1991) outlines vendor performance criteria which show the importance of increasing value provided to the customer through improved quality of service. This research indicates the need for local suppliers to add value through services to reduce the overall costs to their customers. This incorporates the "total product" concept as outlined by Coppett (1988) and supported by Hayes and Hartley (1989). Under this concept, the product is more than a good, it is also the service package which delivers and maintains that good for the customer.

Purchasing managers affect, to some degree, a definition of service quality through their purchasing and procurement policies. While references to procurement policies are rare (Arnold 1989), research by Noordeweir et al. (1990), Liswood (1989), and Sonnenberg (1989) comment on supplier relations and their implications. Lyons et al. (1990) discusses the concepts of supply base reduction, long term relations such as partnering, cost reduction and quality improvement.

With purchasers developing policies designed to improve the overall value of the goods and services purchased, the suppliers have an increased need to be concerned about the quality of the goods and service supplied. In a study comparing the perceptions of 525 industrial customers to the perceptions of service managers in an office equipment supply firm in Holland, Kasper and Lemmink (1989) found that supply service manager's expectations were higher than the customer's expectations. Local evidence, however, contradicts this idea, and may warrant further research which is either regional or industry specific to determine the cause. Many metro-Edmonton supply firms have the attitude that they are not global competitors, and do not require the same competitive management philosophies as the firms they supply. However, in today's global marketplace, local supply firms are not isolated, and cannot behave as if they are. The firms which they supply face world markets, and require service quality which will support global competition. The following case illustrates this point.

Background

The petro-chemical industry is a globally competitive industry, and must constantly improve the value of its products. The petro-chemical industry in the metro-Edmonton area comprises about 3 dozen plants with yearly purchases of over 3 billion dollars. These plants have two natural disadvantages which impact on competitiveness. One is the northerly location which requires many specialized parts to deal with extreme temperature variations. The other is that the firms are landlocked, and face high shipping costs. These circumstances require efficient, high value, low cost supply of goods and service to maintain a competitive position.

While this industry has been growing in significance, the oil and gas sector has been in decline. Many of these same firms supply both industries, creating an interesting situation of declining real prices for supplies. These have negatively impacted the suppliers, but have given relief to the chemical industry, which purchases these supplies. Curry and Riesz (1988) has discussed these relationships in the product life cycle context. The local evidence is consistent with these findings, as the real prices for goods and services has declined with the industry.

The increasing significance of the petro-chemical industry, in conjunction with the decline of the oil and gas sector led the Edmonton Economic Development Authority (EEDA) to examine the supply system to identify opportunities for improvement. The EEDA representative is an expert in Total Quality Management (TQM), and familiar with the movement to implement TQM in the local petro-chemical plants, and applied TQM methods to the problem. The first step was to ask the "customers" about supply conditions, and suggestions for possible improvements which could lead to local opportunities.

The following information was provided by the petro-chemical company purchasing managers (the customers). During the past 10 years, local firms have lost supply business due to "poor quality of service." The purchasers defined "poor quality" in terms of delivery, product specifications, paperwork and general attitude of suppliers. It was felt that suppliers developed a poor service attitude in the oil and gas boom of the 1970's which still lingers.

The results have had a serious impact. In the last 5 years alone, 400 suppliers have been cut from the list of suppliers for local petro-chemical firms. Purchasing agents have indicated that 400 more will be cut over the next few years. Because this could mean a difference of hundreds of millions of dollars to the local economy, a concerted effort has begun to focus on service quality to address this problem and reverse this trend.

The petrochemical companies stated a desire to increase the local component of supply to develop closer ties with suppliers. To achieve this end, EEDA began working with firms in the metro-Edmonton area. With the assistance of a representative of the purchasing agents, a list was generated of supply firms to approach. The EEDA then arranged and participated in face to face meetings between suppliers and representatives of the local petro-chemical firms, with the objective of increasing both the quality and volume of local supply to this industry.

The following are examples of the service quality problems raised in the meetings:

-- For some suppliers, 30% of parts supplied do not even meet the manufacturers specifications.

-- The average delivery time for parts in inventory is 3 days. The travel distance is 20 miles.

-- One "average" supplier has an order processing time of 1.5 days. This is the time from when the phone is hung up until the stock is being prepared for shipment.

-- The average on time delivery percentage is 70. This is measured against time promised by the supplier. If for example, the supplier promises delivery in 3 days (for the 20 mile distance) it is still late 30% of the time.

-- One supplier, when asked to locate a facility near one of the plants and increase sales substantially responded "If they want it done there, why don't they do it themselves?" When queried as to whether business was so good to turn down this opportunity, the response was "No, we're having a terrible year."

-- Another supplier, when contacted by the EEDA regarding addressing quality issues stated "If they want to talk to me, they can call me."

-- A third supplier, when informed of the potential opportunity for increased business said "We don't do as much business there as we used to." When asked when they did more business with those firms, the response was "When one of our sales people lived there and talked to the purchasing agent regularly."

-- A fourth supplier, when asked if interested in increasing both quality and volume of service said "You'll have to contact the head office, we're not allowed to make those decisions here."

-- A supplier, during a meeting with the purchasing representative stated "We are being audited for Q 9000.3 (a quality standard similar to ISO 9000.3)." The purchasing agent responded "Your on time delivery measure is 56%." The supplier was busy trying to conform to a standard which was not required by the customer, while failing to identify what the customer actually wanted.

These comments indicate a lack of concern and understanding on the part of suppliers as to the importance of high quality service. However, purchasers in this industry are able to demand high quality and are adamant about getting it. The purchasing agent for one firm stated "We will get top quality suppliers one way or the other. It may be through improvements in our current suppliers, or through finding new suppliers." The firm he represents is one of the most efficient in the Dow Chemical system, and will be the largest Dow plant in Canada when the current expansion is completed.

The Requirements for Suppliers

The purchasing agent representing the petro-chemical firms outlined the "bottom line" for doing ongoing business. This represents the long range goal for suppliers. Firms not complying with these requirements will eventually be dropped or replaced. There are six major criteria to be met by suppliers, and they are listed below, with brief examples of why they are required:

-- 100% on time delivery. Parts are to be delivered when promised, every time. The next step will be to reduce mean delivery times.

-- 100% compliance to both manufacturer and customer specifications.

-- Suppliers carry the inventories required to meet the customer's needs.

-- Competent technical support for products. Sales representatives must assist in solving problems related to their products.

-- Practice and communicate self evaluation. Suppliers must develop and maintain a continuous improvement system.

-- Conformance to administrative needs. The appropriate paper work must accompany orders every time.

The purchasers offered insight into the justification for these requirements. Variability in delivery times, which is a problem with some suppliers, can cause planning problems for the buyers. The firms producing and distributing products should know how long it takes to make the delivery, and promise a time accordingly. With respect to product conformance, in many instances, 30% or more of parts for an application did not even meet the supplier's specifications, and were thus rejected by the customer. In this day of high quality manufactured parts, many still are of poor quality. Other supplier services such as carrying inventories and providing training are also becoming elements of competitive advantage. Currently, customers have to carry inventories of supplies because the distributors of the supplies will not. This causes some customers to deal factory direct to obtain lower prices, since the level of service provided by local suppliers does not justify a higher price. Service quality extends throughout the customer relationship, including shipping and billing procedures. Orders which arrive without the proper supporting documentation must be sent back.

Buyers are also looking for suppliers who strive for continuous improvement and an increased customer focus. Many suppliers now use the customer as a means for training their inside staff. Suppliers should also track their service and products, using measures which will enable improvements to be targeted and implemented. In cases where two or more firms have equivalent quality of products and services, the firm which has the best continuous improvement process will be chosen. Unfortunately, many firms do not ask for regular evaluations of performance, and thus do not have the information required to identify problem areas.

Conversations with purchasers focused on "value" as the key characteristic desired. Value represents the total package in terms of overall costs for getting the product into use. For example, one local supplier is developing a repair facility which will reduce the need for inventories of parts, while increasing service levels and reducing response times. Another supplier worked with users of a product to develop on site repair procedures to reduce the customer's need to carry spare parts on site. These are the types of innovative services sought, as they reduce costs for both sides while improving the service.

The requirements found in our study are consistent with those in other published research. Arnold (1989) suggested the need for meeting quality requirements at the lowest cost, representing "value." Williams and Smith (1990) discussed the need for continuous improvements, and that the product may be a service in conjunction with the good. He also pointed out the need for the supplier to involve the purchaser in determining requirements. Sonnenberg (1989) showed that poor service, rather than price was the main reason for switching suppliers. Reliability, responsiveness, assurance, empathy and tangibles were listed as important factors to purchasers. These coincide with those given by local purchasers, and research by Powers (1988), and the Reliance Electric case study of Singh (1990). The need to translate customer requirements into quality guidelines and to institutionalize improvements based on customer needs was also addressed by Cravens et al. (1988). These studies reinforce our findings that service quality is an important element in competing in today's market. The following examples highlight the successful use of supplier service to gain competitive advantage.

Examples of Successful Firms

Not all firms supplying the local plants have poor performance records. Some of the suppliers are exemplars of the service quality desired, and perform well against the criteria supplied by the purchasing agents.

Nuts and Bolts

A local, smaller firm supplies nuts, bolts, hand tools and other small items to the industry. Their on time delivery of orders of 98% is the highest of all suppliers. The firm also delivers twice a day, and will "hot shot" emergency orders at no extra cost. The error rate on paperwork has been dramatically reduced through a computer ordering system recently implemented.

The firm has moved 15 minutes closer to the major customers and increased its warehouse space from 35,000 square feet to 100,000 square feet in the last year. The expansion was required to meet increased demand from all customers. Significantly, the firm has an excellent continuous improvement system in place with active participation by the employees. The company also has a supplier partnership arrangement with a major chemical plant.

Electrical Wire Products

A wire products supplier, part of a national firm, has an on time delivery of over 96%, with error free orders. The delivery lead times vary depending on the product, but are the lowest of all wire product suppliers. There have been no product rejects. The speedy, on time delivery has been facilitated by a computerized ordering system which tracks supply locations for products and accurate delivery time information. The result of this service has been a dramatic increase in sales, which enables large reductions in price.

These reductions were passed along to customers. The supplier stated that they desire a certain margin, and no more, therefore, all savings are passed on to all customers. An example of this policy comes from one buyer who did not update the price information and overpaid for supplies. The wire products firm complained, but did not receive prompt action. They took their concerns to the Vice-president of the customer firm, demanded updating of price lists and issued a refund cheque.

Heavy Duty Valves and Fittings

A third company supplies valves and fittings, and desired to reduce inventories while improving service and reducing overall cost to the customer. They developed a service routine for expensive, made to order valves which would keep valves in service while replacements were being manufactured. Shop floor space was expanded and service equipment installed. Service personnel would provide 24 hour on site service to maintain operation while awaiting new parts.

The delivery times are accurately estimated to enable planned shut-down for installation of new valves. The savings in inventory are more than double the cost of providing increased service. Part of these savings are used to increase inventories of "problem" parts which have higher variability in delivery times. This firm has a "total product" philosophy.

Specialty Metal Products

A fourth firm supplies specialty metal products. Almost all of these products are "one-of-a-kind" items, difficult to inventory. The firm has identified the users of the products, as opposed to the purchasers, and worked out methods to identify needs and specifications in time to have the custom product manufactured and delivered before failure of the existing part. They are now a distributor with almost no inventory. Their "product" is almost all service.

Other suppliers of these products have waited for orders before acting. This company has moved to identify customer needs from the "total product" concept to anticipate and meet customer needs as required.

All of the above firms spent a great deal of time communicating with the purchasers, product users, and transportation companies. The key product characteristics were identified. Many were actually services. This enabled these companies to differentiate themselves from commodity suppliers who can only offer price. The four example firms provided a value package which reduced the overall customer cost because of the service component. The increased business resulting from this approach has enabled the firms to lower prices due to larger volumes, consistent with Arnold (1989).

Closing Comments

The metro-Edmonton petro-chemical firms are demanding improved service quality from their suppliers. Failure to meet these requirements will result in a total loss of business in the long run. The process has already started. Those who are proceeding with Total Quality Management (TQM) are not only receiving better performance ratings, but will also quality for supplier partnerships. To qualify for partnerships, a firm must have a performance rating in the upper 90% range, with on time deliveries of 96%.

Suppliers which received good ratings had some interesting characteristics. The key characteristic is that they sent a full compliment of senior persons to the meetings, and actively participated with questions on their performance and how they were being measured. This is a service parallel to the type of senior level action and commitment required by the manufacturing sector, as suggested by Reitsperger and Daniel (1990). This is a very important fact which is consistent with the TQM philosophy. These individuals are fully aware of the strategic importance of service and product quality. Several leading suppliers left the meetings with firm action plans, having identified 3 or 4 areas for immediate improvement. One of these firms was offered information regarding supplier partnerships. These firms took the lead in monitoring their own performance and striving for continuous improvements. One firm was even recognized for voluntarily passing along price reductions made possible by increased sales volume. One new plant currently being commissioned is developing a TQM system, and has stated a desire to have as many supplier partnerships as possible. The focus will be on fewer suppliers who prove to be more adept a meeting the changing needs of the customers.

In 1982 Leonard commented on the "incline of quality" and its importance. The increasing importance of quality in the delivery of goods and service was accurately foretold. In 1984, Garvin expanded this concept into the strategic arena, promoting quality as an important strategic weapon for business success. The intervening years have validated these concepts. The "From the Editor" page in the January-February 1991 Harvard Business Review, titled "Ever Closer to the Customer" captured these ideas in 1990's terms. Suppliers must meet customer requirements and help solve problems. They must properly identify who the customer is. They must use customer data to benefit the customers. These points were all illustrated in this local study of suppliers to the metro-Edmonton petro-chemical industry. Failure to accept the responsibility to meet the customer needs will lead to failure. In the global context, service quality is not only a strategy for success, but a condition for survival.

References

Arnold, U., "Global Scourcing -- An Indispensable Element in Worldwide Competition", Management International Review, 1989/4, pp. 14-17.

Berry, L., L. Zeithanal, A. Valarie, and A. Porasuraman, "Five Imperatives for Improving Service Quality", Sloan Management Review, Summer 1990, pp. 29-38.

Cohen, M. A. and Hau L. Lee, "Out of Touch With Customer Needs? Spare Parts and After Sales Service", Sloan Management Review, Winter 1990, pp. 55-66.

Coppett, J. I., "Auditing Your Customer Service Activities", Industrial Marketing Management, November 1988, pp. 272-284.

Cravens, D. W., C. W. Holland, C. C. Lamb, Jr., and W. C. Moncrief, III, "Marketing's Role in Product and Service Quality", Industrial Marketing Management, November 1988, pp. 285-304.

Curry, D. J. and P. C. Riecz, "Prices and Price/Quality Relationships: A Longitudinal Analysis", Journal of Marketing, Jan 1988, pp. 36-51.

Cusumono, M. A. and A. Takeishi, "Supplier Relations and Management: A Survey of Japanese, Japanese Transplant and U.S. Auto Plants", Strategic Management Journal, Nov. 1991, pp. 563-588.

DeSouza, G., "Now Service Businesses Must Manage Quality", The Journal of Business Strategy, May/June 1989, pp. 21-25.

Garvin, D. A., "Product Quality: An Important Strategic Weapon", Business Horizons, May-June 1984, pp. 40-43.

Hayes, H. M. and S. W. Hartley, "How Buyers View Industrial Sales People", Industrial Marketing Management, May 1989, pp. 73-80.

Jackson, R. W. and P. D. Cooper, "Unique Aspects of Marketing Industrial Services", Industrial Marketing Management, May 1988, pp. 111-118.

Kasper, H. and J. Lemmink, "After Sales Service Quality: Views Between Industrial Customers and Service Managers", Industrial Marketing Management, August 1989, pp. 199-208.

Kohoutek, H. J., "Coupling Quality Assurance Programs to Marketing", Industrial Marketing Management, August 1988, pp. 177-188.

Leonard, F. S. and W. E. Sasser, "The Incline of Quality", Harvard Business Review, Sept-Oct 1982, pp. 63-74.

Liswood, L. A., "A New System for Rating Service Quality", The Journal of Business Strategy, July/Aug. 1989, pp. 42-45.

Lyons, T. F., A. R. Krachenberg, and J. F. Henke, Jr., "Mixed Motive Marriages: What's Next for Buyer-Supplier Relations?", Sloan Management Review, Spring 1990, pp. 29-36.

McKenna, R., "Marketing is Everything", Harvard Business Review, Jan-Feb 1991, pp. 65-79.

Noordewier, T. G., G. John, and J. R. Nevin, "Performance Outcomes of Purchasing Arrangements in Industrial Buyer-Vendor Relationships", Journal of Marketing, Oct 1990, pp. 80-93.

Powers, T. L., "Identify and Fulfil Customer Expectations", Industrial Marketing Management, November 1988, pp. 273-276.

Reitsperger, W. D. and S. J. Daniel, "Dynamic Manufacturing: A Comparison of Attitudes in the U.S. and Japan", Management International Review, 1990/3, pp. 203-216.

Singh, M. P., "Service as a Marketing Strategy: A Case Study at Reliance Electric", Industrial Marketing Management, Aug 1990, pp. 173-200.

Sonnenberg, F. K., "Service Quality: Forethought, Not Afterthought", The Journal of Business Strategy, Sept/Oct 1989, pp. 54-58.

Weber, C. A., J. R. Current and W. C. Benton, "Vendor Selection Criteria and Methods", European Journal of Operational Research, Jan 1991, pp. 2-18.

Williams, A. J. and W. C. Smith, "Involving Purchasing in Product Development", Industrial Marketing Management, Nov 1990, pp. 315-320.

Author

Barry McIntyre, Manager, Economic Development, Edmonton Economic Development Authority, Engineering Management Lecturer, University of Alberta, Edmonton, Alberta, Canada.
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Title Annotation:Special Issue: Strategic Quality Management
Author:McIntyre, Barry
Publication:Management International Review
Date:Feb 1, 1993
Words:3721
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