Abstract/Summary

The cost of quality (CoQ), or more specifically, the costs of producing poor quality parts or providing inferior service, has received considerable attention among academics and practitioners. Most frequently, the CoQ is calculated through the PAF model, which accounts for the costs associated with prevention(P), appraisal(A) and failures(F) due to poor quality. There are discrepancies in the literature regarding whether or not a trade-off exists between quality and productivity in a service environment. If a trade-off exists, then the CoQ equation is incomplete. That is, if a company chooses to prioritize higher service quality levels over productivity, the service quality comes at the expense of lost productivity, and the CoQ equation must therefore include an opportunity cost term. Through the use of structured equation modelling and an embedded case study of a company in the express courier industry, this thesis set out to answer two research questions: 1) Do service organizations face a trade-off between service quality and productivity? 2) If such a trade-off exists, what is the opportunity cost due to lost productivity for a service organization faced with a trade-off between quality and productivity? The structured equation modelling has yielded a simplified model that makes it generalizable to broader operations management scenarios. The model amounts to the following: how much work is required (volume of transactions, etc.), how many full-time equivalent employees (FTEs) are going to be utilized to handle the workload, and what is the resultant impact on service quality and productivity? Applying the model to the courier company that is the subject of the embedded case study shows that some of the company’s Canadian depots are operating in a trade-off state. For those depots, closing the gap from their current service levels to 100% on-time performance would result in approximately CA$3 million in lost productivity per year, a 37.3% increase over current labour costs.