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HOW HIGH SALES HIDE BAD QUALITY

by Rene T. Domingo

In a typical top management meeting - like that of the executive committee or board of directors - the first item in the agenda is usually sales performance. Much time is allotted to discussing sales increase or decrease over the prior period, achievement of quotas or targets, and improvement in market shares. If the positive change in sales is accompanied by an increase in profits, the discussion ends with a euphoric high note. The remaining time is probably devoted to finding out who should get the credit or get promoted - vice president and/or manager. The last few minutes are hurriedly but unemotionally spent on self-congratulation by the attendees, i.e., deciding how much bonus each executive would partake as a result of this fine corporate performance which is none of their own doing. Usually left out in this high-powered meetings are discussions or even mentions of how the company fared in product quality and customer service during the last period. The omission is usually rationalized by the prevalent executive attitude: "If sales and profits are up, there should be no problem with our quality and service. Our customers must have loved us and our products."

Bad quality, like many other corporate diseases, attacks and destroys like cancer -- without warning or painful symptom that would signal a crisis. Bad quality and bad service, if left unnoticed and unattended for extended periods, can annihilate even an industry leader. The problem starts with a few dissatisfied customers who would not affect projected sales figures. As word of mouth spreads, the desertion and mass exodus to competitors accelerate rapidly and irreversibly. A healthy market, as if without reason, suddenly dwindles. Executives start pointing fingers not to themselves, but downwards the hierarchy. Crisis management ensues to no avail. The game is over. No industry leader in the world which has lost its market share to a competitor because of poor quality has ever regained its original position.

The sacred corporate dipsticks of performance like sales, market share, profits, return on investment, or even price/earnings ratio are totally inaccurate as indicators of quality and service. In fact, there are very effective in hiding problems in these critical areas especially in their early stages as explained above. In the long run, good quality and service should result in increase in sales and profits. But bad quality and service will not always and immediately result in their decrease. The response is always delayed and the time lag is long. If bad quality eventually affect sales and profits to be noticeable by top management, the problem has become chronic and may be irreversible. Studies have shown that getting back the loyalty and patronage of lost regular customers will involve the same amount of time, money, and effort as if your were wooing new customers.

In what ways can high sales hide bad quality? An increase in the sales of a monopolist, say an inefficient utility firm, may not come an improvement in its service, but from an increase in the population of dissatisfied customers who have no other place to go to, or from the company's unilateral price increases. Similarly, growth in population and consumption may explain the ever increasing sales of oligopolists and government-regulated industries, like petroleum companies, which sell practically the same product, with the same quality standards, at the same price. Unless threatened by outside competitors or deregulation, these protected and powerful companies can easily hit their sales targets, without including "customer service" in their vocabulary.

In countries where the local industries enjoy high tariff protection from exports, companies, which primarily cater to local markets and need not fight world-class foreign competitors in quality and service in the home country or abroad to increase sales and market shares, lull themselves into complacency. The local market, not knowing quality any better, has been used to their mediocre levels of domestic quality and service. Customers have lowered their quality expectation, consciously or unwittingly, to the delight of these stagnant local producers which rake in profits from the customers' ignorance and naivete.

Not only protected and regulated industries can get away with bad quality; freely competing companies can also mask bad quality with high sales. The only only difference is that the former is more prone to complacency and less prone to quality improvement. Sales figures of all companies, whether in units or dollars, do not show nor account for lost customers. You can lose customers and increase sales and market share at the same time by a) replacing them with new, perhaps bigger, accounts or b) selling more to the remaining customers. (TABLE 1) If customers are lost because of poor quality or service and not because of reasons beyond the company's control like relocation, high sales figures which meet or exceed targets or forecast will hide the problem from management. Yes, fat commissions will be paid and people promoted. In the euphoria generated by the increased market share, it will not occur to anybody to ask the stupid question "Have we lost a customer?". The principle is, whether sales targets are met or not, let your marketing people regularly report on lost accounts, why they were lost, and also on regular accounts which have reduced their purchases. Remember that sales figures are lump sums which hide a lot of critical details.

Sales growth can conceal bad customer service. Sales will increase if the salesman push the product to get his quota or commissions such that the customer is pressured to get more than what he needs or buy product types different from what he wants. But this pressure selling which is a form of bad service that cause ill-feeling and deep regrets by the customer, will backfire in the next period with reduced purchases. Top management seldom see nor care to see in the marketing vice president's presentation how much of the sales were due to pressure selling.

Bad service before and after sales are also hidden by the sales figures. Long delivery period, long customer order processing times, and long customer queues are not reflected nor measured by sales. The irritation, anger, and lost accounts due to delayed deliveries are not part of a regular sales report. If sales figures are going up, these "complaints" are dismissed as natural, liveable, and the industry practice (Everybody else is doing it.). To effectively measure sales performance, split the figures into two: sales delivered on time, and sales delivered late, and set separate targets for each. Lumping them together is intentionally and dangerously concealing the delivery problems.

Poor after sales service is also not reflected in market share reports. Slow or no response to customer calls and complaints, unavailability of spare parts or repair centers, and not honoring warranty claims are a few example of customer disservice which can affect future sales from the complainant or his friends. Many industry leaders with huge market shares are also known for bad after sales service. The reason: they care only for sales - not before or after.

High sales can also hide poor product quality. Sales can actually increase even with high customer return rates of defects if sales volume increases. (TABLE 2) Sales growth can mask and include sales of seconds, downgrades, scrap, in short defects, that should require management attention. Few product variety and short shelf or product life, indicators of bad quality, are sold by monopolists everywhere. Finally, increasing sales can conceal internal quality problems such as high rework or recycling rates of defects and rejects, and excessive inspection (sorting) costs. If sales are growing, management do not pay attention to these production problems which may cause a crisis later on. Finally, sales may be rosy even if there is no product or process improvement, essential in coping with world class competition.

A company that embraces Total Quality Management (TQM) sets standards that reflect quality and service, not just financial performance. TQM companies are agile, flexible and responsive because they get immediate customers feedback - positive or negative - from employees, management, and the customers themselves. Anything not measured cannot be improved, says a TQM dictum.. Measure the right things, and improvement - or correction - is just a matter of time.

Table 1 INCREASE IN SALES HIDING A LOST CUSTOMER

Year 1
Year 2
Total Sales
1,000
1,500
Sales by Customer
Customer X
400
900
Customer Y
250
600
Customer Z
350
0
Total Sales
1,000
1,500

Table 2 INCREASE IN SALES HIDING INCREASE IN PRODUCT RETURNS

Year 1
Year 2
Total Sales
2,000
3,000
Gross Sales
2,500
4,000
Returns (defects)
500
1,000
Net Sales
2,000
3,000

 


 

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