Fee-Based Services

May 1, 2003
Electrical distributors are moving from a product-push definition of management to a service stance that adds value. But, only the most courageous and

Electrical distributors are moving from a product-push definition of management to a service stance that adds value. But, only the most courageous and insightful electrical distributors will make the grade in this transition.

This series of four articles will help you make this transition. The series attempts to answer heady questions of value-added services and develop a plan to measure, change and charge for the value provided.

If you read our initial installment (Electrical Wholesaling, April 2000, p. 48), you are aware of the new value-added proposition of wholesaling - namely service management and differentiation. Service differentiation takes two primary steps. Both steps are essential to the journey; taking one without the other usually doesn't work.

The first step is management of expected services. In short, managers must learn how to measure, troubleshoot, improve, and test market fixes to current services. The tools needed to conquer this are service research, complaint measurement, process correction reports, process documentation and reconfiguring existing services. The gist of managing expected services is that they must be measured in a meaningful fashion, have their problem areas pinpointed by customer and employee input, and reconfigured using quality management principles.

The second step is creating new services from existing service platforms. For instance, an early morning delivery service (expected service) changes to a nighttime delivery service at the customer's site. Service creation and a process called New Service Development (NSD) is the value-added area we consider of leading importance. We will cover the NSD process in the latter part of the series. First, let's understand how to manage and improve expected services.

Value as a Chain. From the Service Hierarchy on page 37, you see that the base of the pyramid is expected services. These are the services that are "expected" by your customers just to compete for orders. They include picking, packing, shipping, storage, nominal technical support, invoicing, breaking bulk, and warranty/credit issuance. If you are not willing to engage in managing the basics, your efforts will be severely curtailed when NSD is possible. Why? Because expected services are the bedrock of all other services.

For instance, suppose your early morning delivery service also has a high error rate on shipments. Let's say you ship orders complete, but you don't ship the right products. If you follow through with developing the new service of nighttime delivery, the customer will learn that you ship the wrong products more quickly. In essence, it's important to fix the expected service before you launch new services.

Service value is like a chain. There are many connections in the linkages of one service, and it's important to fix the expected links before adding augmented or potential services. The old cliche, "the chain is only as strong as its weakest link" is certainly true. Getting expected services under control is the best place to start. Of course, you can continually improve expected services and never have time for NSD, so using good judgment is the key. Just make sure your expected services are close, equal to, or slightly better than the competitions' in a measure called relative satisfaction.

Satisfaction Research Concepts and the Basic Service Improvement Model. The use of satisfaction research to measure services started about 20 years ago. The push for customer satisfaction began with the resurgence of quality management techniques in the 1980s. Automotive companies and leading consumer durable companies began to measure customer satisfaction for service and product performance variables.

We argue for the use of satisfaction research in service measurement. Other schools advocate loyalty research, but satisfaction research is an excellent instrument to gauge service offerings. Unfortunately, many wholesalers haven't started using this research on a regular basis. We believe this probably stems from the fact that wholesaler managers don't necessarily know what to do with the data once they get it. We also don't buy the bevy of excuses surrounding the research - including it's too expensive, too time consuming, and not indicative of customer preferences. Good research is inexpensive, from $5,000 to $10,000 per year. It takes very little time to manage once initiated (five to 10 hours per month). And, as long as you have a valid sample of customers, the research is quite accurate in its picture of customer preferences.

An "attribute report," is common satisfaction output. The report, for fictional wholesaler Stoney Electric, has 12 satisfaction variables. The variables cover common service areas of inside sales, warranties, returns, outside sales, delivery, etc. In actuality, it's common to find more variables than those presented. The report is compiled from a survey that rates satisfaction among five variables (1 = completely dissatisfied, 2 = somewhat dissatisfied, 3 = neither satisfied nor dissatisfied, 4 = somewhat satisfied, and 5 = completely satisfied).

The comparative Percent Completely Satisfied uses only a 5 score. This is typical since those that rank a "5" show little variation in their response and are a good base for comparison. For example, in the attribute handling of warranties/returns, the respondents rank Stoney's performance at 22% vs. the competitions' at 38%. The pound sign (#) beside the variable indicates a verifiable statistical difference in the variable scores. This is done using a test called means testing at a 90% confidence level. The survey clearly points to Stoney's execution of warranties/returns being inferior to the competitions'. It's important to note that the comparison of performance is relative. In service research few absolutes exist because service value is intangible.

It's also important to note that the ranking of the variables is determined mathematically. A statistical correlation using simple linear regression is done to rank each variable's individual influence on overall satisfaction. The ranking delivers what is termed derived importance and is a straightforward but reasonably sophisticated way to rank service variables for prioritization.

Satisfaction research is reasonably easy to perform given a qualified researcher. The thrust of this introduction is to give the reader exposure to the research and its usefulness. If you are wondering about the usefulness of the research, ask yourself how else could you accurately measure customer perceptions of service quality? The answer to the question, for many managers, is that satisfaction research remains one of the more legitimate means by which to measure perception of service quality.

But, satisfaction research is not the only method by which to gauge service error and performance. Two other instruments, complaint management and process correction reports, also gauge service perception. A Complaint Report is logged into the computer system by an inside sales employee. The complaint is given a log number, and a disposition code is assigned by a reviewer for further action.

The Complaint Report describes an overdue credit for a customer. The customer's bookkeeper, Betty Jones, describes a problem with a nonstock item. The item was purchased in September, returned in October, and in February and the credit has not been received. The writer further describes the company's policy of not giving credit until credit is due and problems with the vendor, Frisco, on nonstock credits.

The Process Correction Report is the same as the Complaint Report except it is written by employees on observations of service. In short, complaints are registered from direct customer commentary; process corrections are registered by employees about observed process error.

Most wholesalers understand that capturing complaints and employee observations are important. The challenge is how to use the data once it's compiled. The chart links satisfaction research, complaint measurement, and process corrections into a system that validates an ongoing trend of process error. In essence, each measurement tracks error from three different sources including: empirical research, customer commentary and employee observation. The number of offenses are reviewed to establish if there is an ongoing trend of error.

Once a trend is established, management reviews current processes, changes them if necessary, and tests a new procedure. If the new procedure is more accurate and accepted than the previous, the procedure should be changed. For our example, Stoney Management decides that a hard debit to the manufacturer after 30 days is a policy solution.

Capturing complaints, process error and customer perceptions of satisfaction may seem like overkill in pinpointing service error. In reality, the system, once initiated, is quite easy to maintain and use. Typically, the management of the system is the duty of the quality manager. However, usage of the system is everyone's responsibility, and process correction is a team approach. Also, we strongly recommend that quality leaders flow chart major processes, time the individual steps, and cost them (time per step x avg. labor hour cost) to determine the cost of quality for a particular process.

The payoffs to managing expected service with the prescribed process are numerous. First, services can be prioritized and compared to the competition from satisfaction research. Secondly, error can be validated by complaints and process correction reports. And third, troublesome processes can be reviewed and corrected, giving a better level of quality with less error. Finally, processes can be streamlined using the described method.

We believe the key to long-term cost reduction is streamlining service processes while maintaining or enhancing their quality. Service cost reduction is important since approximately 60% of operating expenses are payroll related and the majority of these employees perform rote processes. Most wholesalers, however, hack at operating costs without a good process. They often reduce service quality in the name of cost reduction. It's our experience that cost reduction without satisfaction verification often fails in the long run. Why? Customers eventually notice the reduction in process consistency, the price/value relationship dips and customers seek better service for their dollar elsewhere. We can't stress enough the importance of a solid, documented link between process change and customer satisfaction. The process is too important to be ignored and will be integral to the new ISO regulations due out in November 2000.

In our next installment, we will review the foundation for developing new services and charging for them.