QUALITY COST MANAGEMENT SYSTEM IN CROATIAN AIRPORTS

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1 Izvor: 2nd International M-Sphere Conference for Multidisciplinarity in Science and Business, Book of Proceedings, M-Sphere, Dubrovnik, 2013, p ISBN QUALITY COST MANAGEMENT SYSTEM IN CROATIAN AIRPORTS Mr. sc. Gabrijela Špoljar Zagreb Airport, Ltd., Zagreb, Croatia Dr. sc. Miroslav Drljača Zagreb Airport, Ltd., Zagreb, Croatia Dr. sc. Diana Plantić Tadić VERN University of Applied Sciences, Zagreb, Croatia ABSTRACT Quality cost management presents significant challenge for managers at Croatian and other airports. The former way of measuring business perfomance was based on passenger traffic, cargo traffic, aircraft traffic and financial results, without the analysis of impact of quality costs on business results. The cost which was produced due to (non)quality has not been recorded at all, and the lack of managers' knowledge of the content and structure of quality costs and the possibility of applying modern methods of quality cost tracking presented a considerable problem, which in turn prevented a satisfactory quality cost management. As a specific type of cost, the quality costs represent a certain financial reserve that we can define and direct to business activities. These can then contribute to competitiveness, which is very important in the present recession period. It is recommended to improve characteristics of airport management system by the implementation of ISO 9001 norm requirements, which are the necessary infrastructure for building a quality cost management system. The research, as the platform for this paper, is focused on the development degree of quality cost management systems at the Croatian airports. In the research we used scientific cognitive methods with emphasis on statistical method, comparative method, as well as on the methods of induction and deduction. Primary research was conducted at the seven airports in Croatia: Dubrovnik, Osijek, Pula, Rijeka, Split, Zadar and Zagreb. The research results show the implementation and certification phase of ISO 9001:2008 quality management system, as well as the development degree of quality cost management systems at the Croatian airports. Key words: Quality, Croatian airports, Quality costs, Quality cost management 1. INTRODUCTION The main objective of the management of airports in the current development model is the business excellence while ensuring required quality of rendered services. In doing so, one of interesting areas to explore is the area of quality costs which can be optimized through planned activities without adverse effects on the achievement of the mission, as well as short-

2 and long-term management objectives. The activities of business processes as a result have usefull effects that contribute to the quality of service, but the result of business processes are also negative effects. Improving business processes through implementation of improvement measures which also include optimization of the quality costs is considered to be a logical decision. This approach is considered to be usefull for improvement of the current situation in the Croatian airports where the streamlining and optimization of the quality costs in business processes is not considered in appropriate manner. 2. QUALITY COST MANAGEMENT IN CROATIAN AIRPORTS It is necessary to reach the stage of quality cost management to fulfill the requirements of all stakeholders. On one hand, for the owners of airports it means achieving and securing profitable business, while on the other hand, users of airports expect a satisfactory level of service quality Conceptual definition of quality costs Quality costs are the costs incurred while ensuring satisfactory quality and gaining confidence in it, as well as losses suffered when the level of quality was not achieved. It is basically divided into: the costs for quality (with associated forms of prevention and appraisal costs) and the costs of non-quality (with associated forms of internal failure costs and external failure costs). Structural classification starts with basic division within the group of quality costs, and further subdivision into cost groups: TG 1 Prevention costs, TG 2 Appraisal costs, which comprise costs for quality, and TG 3 Internal failure costs, TG 4 External failure costs, which make the costs from (non)quality ISO 9001:2008 quality system in Croatian airports Achieving the required quality, as an unavoidable concept in achieving competitive advantage, and achieving higher revenues than costs with the aim of ensuring profits is not an easy task for the management of airports. In order to prove quality, among others, the management may make a strategic decision to establish a quality management system in accordance with the requirements of the international standard ISO 9001:2008. The reason for this might be that this international standard promotes the acceptance of the process approach when development, application and improvement of effectiveness of the quality management system increases the satisfaction of customers/users by fulfilling their requirements, or by fulfilling required levels of service quality. From the aspect of quality cost management, one of the requirements of this International Standard is monitoring and measuring the quality costs in the organization as evidence of continuous improvement, through development of a system for quality cost monitoring. According to the research results, process-oriented domestic airports are a minority, with the exception of two airports which have, through an introduction and confirmation of the quality system in accordance with the requirements of ISO 9001:2008, proven the transformation of the business system to process orientation. Two certified airports in Croatia have attempted to determine the quality costs, although only one of them was able to determine and classify the structure of the quality costs. 1 Miroslav Drljača, Small Encyclopedia of Quality, Part V Quality costs, Oskar, Zagreb, 2004, p

3 According to the responses, the reasons for the failure to establish and track quality costs are found in a lack of management education on quality costs. In circumstances when airport services market should go through the process of liberalization, that is, when the airport should accept competition, the lack of application of this managerial tool represents an untapped opportunity in the optimization of resources in order to optimize the quality costs, and thus to reduce total costs of an organization. To successfully manage the quality costs, airports should realize few assumptions: 2 1. Implement and certify quality management system according to the International Standard ISO 9001: Develop and adopt a system of quality cost management. 3. Develop documentation infrastructure, with the established and accepted methodology system encompassing quality costs. 4. Implement a system of quality cost management. 5. Analyze system performance. 6. Continuously implement improvement measures. 7. Continuously educate management Normative base for encompassing quality costs International Standard ISO 8402:19943 in section 4.2 states that quality costs include all costs incurred by undertaken activities in making decisions about the quality. The obligation of the business system is to choose a system and method of calculating costs, which will be most suitable for monitoring the quality costs, with the aim to ensure relevant information base for quality management. Each airport should classify quality costs in accordance with their specific operations while it can choose the model that seems the best solution for quality cost monitoring in that airport. International Standard ISO 10014:19954 is based on regulating the need to monitor the quality costs in all business processes and activities in an organization in such way that the quality costs are monitored during the research and product development, through the production or the provision of services process, to the sales process and the benefits expected the customer from products or services. Particular emphasis is placed on the guidelines prescribed by the International Standard ISO 9001:2008 which require that the top management integrates organizational strategy with the quality management, with a particular focus on business processes and on the increase in customer satisfaction. The organization must provide the necessary material, financial and human resources with the aim of development of the system and achieving total quality. Planning and supervising are regarded as feedback through developed communication with suppliers or customers, while rationalization through investment in systematic improvement of quality and cost reduction resulting from (non)quality. Unlike the ISO 9001:2008 standard, which refers to setting up and managing quality system, ISO 9004:2009 standard places an obligation on the reporting of the financial effects of quality management through the preparation of information on incurred quality costs in certain activities and business processes. In order to raise quality and reduce costs due to (non)quality, airports should manage quality costs, but such a positive managerial endeavor is unthinkable without trained staff and implemented system for encompassing quality costs. 2 Miroslav Drljača, Small Encyclopedia of Quality Part V Quality costs, Oskar, Zagreb, 2004, p Quality management and quality assurance Vocabulary: ISO 8402:1994; EN ISO 8402: ISO/TR Technical report, Guidelines for managing the economics of quality

4 Experience with managing the quality costs in the Zagreb Airport shows that there was no data on the quality costs in the first phase of encompassing, although they are present in significant amounts. Afterwards, the phase of their recognition and classification in cost groups follows (TG1, TG2, TG3, TG4). 5 After those first initiatives which recognize almost all existing quality costs, the development of documentation infrastructure will commence to enable their systematic monitoring and analysis. In the last phase, we come to the stage of quality cost management, using different methods, which will ensure necessary management information for decision-making with the aim of optimizing the quality costs. 3. AIRPORTS IN CROATIA Airports are organizations in which demand and supply of services meet while their market position is largely determined by the influence of historical, geographical and political factors Conceptual definition of airport Under the Croatian law, airport is a space open to the public air transport, comprised of certain areas, with operational surfaces, facilities, equipment, machinery, installations and equipment, intended for movement, takeoff, landing and parking of aircraft, and handling of aircraft, passengers, baggage, cargo, mail and other materials. 6 Regulation on airport charges defines an airport as an area on the ground specially adapted for the landing, taking off and maneuvering of aircraft, including associated facilities, equipment and devices designed for air traffic and the provision of services and facilities, resources and equipment to assist in the provision of commercial air transportation services. 7 The Republic of Croatia, according to the number of airports and ports open to international air traffic, is among most developed countries of the world. In Croatia, there are seven international airports in operation. The airports are: Zagreb, Split, Dubrovnik, Pula, Rijeka, Osijek and Zadar, among which the Zagreb Airport and Osijek Airport are located in the continental region, while the other five airports are located along the coast. There are about 1200 airports worldwide 8 which mean that Croatian airports represent about 0.8% of all the airports in the World. On an annual basis, there are around 6 million passengers travelling through Croatian airports, while there are about 3.4 to 4 billion passengers worldwide. According to the size of the infrastructure, the number of passengers and the number of operations, the largest airport in Croatia is the Zagreb Airport, which is also the domicile airport of the national air carrier Croatia Airlines, as well as an air base of the Croatian Air Force. Airports, as well as other organizations, should be viewed as a management system, with all its structural elements. 9 That is important for the understanding of the quality management system as well as subsystems and the process approach. 5 Miroslav Drljača, The quality costs of airports, Collection of Papers XVIII. International Scientific Symposium Transport Systems 2011, Croatian Scientific Society for Transport, Vol. 1, Zagreb, Opatija, 2011, p Law on Airports, NN 19/98 and 14/11. 7 Regulation on airport charges, NN 50/ Miroslav Drljača, Modeling of integrated management systems, Proceedings of the 11th Croatian Conference on Quality and 2th symposium innovative application quality, Croatian Society for Quality, Zagreb, Vodice, p. 31.

5 3.2. The ownership structure of airports in Croatia From the ownership perspective, the Republic of Croatia is 55% equity owner, while the county and local governments are owners in the following percentages: 10 - Airport Zagreb Ltd. with headquarters in Zagreb: Zagreb County 5%, City of Zagreb 35%, City of Velika Gorica 5%. - Split Airport company with headquarters in Kaštela: Split Dalmatia County 15%, City of Kaštela 15%, City of Trogir 10%, City of Split 5%. - Dubrovnik Airport Company headquartered in Čilipi: Dubrovnik - Neretva County 20%, City of Dubrovnik 10%, the municipality Konavle 15%. - Pula Airport Company with headquarters in Pula: Istria County 15%, City of Poreč 15%, City of Pula 8%, City of Labin 3%, City of Rovinj 2%, City of Pazin 1%, City of Buje 1%. - Airport Rijeka Kvarner Riviera Company with headquarters in Rijeka: Primorje - Gorski Kotar County 20%, City of Rijeka 10%, City of Krk 4%, City of Crikvenica 4%, City of Opatija 4%, Municipality of Omišalj 3%. - Osijek Airport with headquarters in Osijek: Osijek Baranja County 20%, City of Osijek 25%. - Airport Zadar with headquarters in Zadar: Zadar County 20%, City of Zadar 20%, Municipality of Zemunik Donji 5%. The owners are expecting a positive economic and social impact through activities of its airports. Interests that are in conflict with the goals of the airports are the absence of significant changes in the policies of the city councils in key areas related to air travel, and specific spatial constraints for expansion of airports to provide better quality of service. To many foreign visitors, airports are the first points of contact with Croatia and its culture, so modernization is one of the main interests of each airport, as well as transformation into an important strategic platform of economic and social development of the cities. 4. SUBJECT, METHODS AND OBJECTIVES OF RESEARCH The subject of research is the level of development of quality cost management systems in Croatian airports. Primary data was collected through the questionnaire method, while a way of communication with the respondents was an administration of a questionnaire answered by selected top experts and key quality managers (where applicable) employed at seven international airports in Croatia, which make the intended sample for this study: Zagreb Airport, Pula Airport, Zadar Airport, Split Airport, Dubrovnik Airport, Osijek Airport and Rijeka Airport. Data collection was carried out in July and August of The survey instrument was a questionnaire which included open-ended and closed-ended questions. The objectives of this research can be classified into two groups: Determining a degree of implementation and certification of quality management system ISO 9001:2008 in airports in Croatia. Determining the level of development of quality cost management systems at airports in Croatia. 10 Law on Airports, NN 19/98 and 14/11.

6 4.1. Limitations of the survey For the conclusions of this study to be used effectively, it is necessary to specify certain limitations of the study which can be classified into several categories. One limitation was the size sample, since there are only seven airports in Croatia open to domestic and international traffic. Thus, it was not possible to have any effect on the size of the sample. Another limitation was that managers employed within different levels of organizational structure at domestic airports responded to the questionnaire. A third limitation was a fact that, depending on the managerial level, there was a different level of awareness of the quality management system, and consequently on the quality costs. The fourth limitation was related to the fact that some results were taken with some reserve because of partial answers to some questions. Notwithstanding the above limitations, collected data represent the entire population, and as such are useful for drawing conclusions about the assessment of the level of certification and implementation of International quality management system ISO 9001:2008, as well as determining the stage of development of the quality cost management system in the Croatian airports. 5. RESULTS Based on the results of seven surveyed airports in Croatia, the survey shows that 29% (2 airports) implemented the quality management system ISO 9001:2008, 14% or 1 airport has partially implemented the system, and that remaining 57%, i.e. 4 airports have not implemented quality management system ISO 9001:2008 at all. Furthermore, only 29% (2 airports) have a certified quality management system ISO 9001:2008, while other 71% (5 airports) have not. Meanwhile, 29% certified airports in Croatia (2 airports) have attempted to determine the quality costs, although only one airport (14%) has managed to identify and determine the structure of the quality costs. It can be concluded that at the airports, that have a certified quality management system ISO 9001:2008, there is a greater degree of awareness on the importance of quality costs management system. In 86% of surveyed airports in Croatia (6 airports), the management does not have a full knowledge on different types of quality costs. The reasons for this, according to the answers of the survey, are found in insufficient education about the quality costs. The purpose of quality cost management techniques is to provide tools that facilitate implementation of quality improvement activities. 11 This observation leads to the conclusion that the management of airports in Croatia are not sufficiently educated on the subject of quality costs, and consequently neither are the employees who participate in the production of costs, and they do not use a system of quality cost management as a tool for management of the system. Quality costs have not been determined or have not been fully determined by 71% of surveyed airports in Croatia (5 airports). The fact that out of seven airports in Croatia, in only three (43%) there were attempts to determine the level of quality costs, and that in only one airport, or 14%, the management identified quality costs and their structure, and that they were not surprised with the established level of costs. According to the research conducted so far in Croatia, quality costs 11 Jack Campanella, Principles of Quality Costs, Third Edition, ASQ Quality Press, Milwaukee, Wisconsin, 1999, p. xvii.

7 are on average 7.8% of the total annual expenditures, while the structure of total costs, according to the answers of surveyed participants is 60% due to the costs of quality, and 40 % due to the costs of (non)quality. These results show that most of the management in Croatian airports does not use quality costs as a system management tool. The goal towards which the airport management should strive to is optimization, or an achievement of a balanced relationship between quality costs and the level of quality of the results of business processes. Figure 1 shows the Characteristics of optimum quality costs in airports. Figure 1: Characteristics of optimum quality costs in airports. Costs Total quality costs Neutral zone Mandatory improvements area Unnecessary enforcement area Minimum quality NQC > 70% CQ > 10% 100% Wastes Optimum point Balanced ratio of costs (50%:50%) Maximum quality NQC < 40% CQ > 50% Satisfaction 100% Quality CQ = costs of quality NQC = (non)quality costs Source: Miroslav Drljača, Small Encyclopedia of Quality, Part V Quality costs, Oskar, Zagreb, 2004, p Figure 1 shows that the optimum point is located within the neutral zone. In this case, the airports in Croatia, in relation to the optimum point, are in the mandatory improvements area since, according to the results of the research, the costs of quality amount to 60% on average, while the (non)quality costs amount to 40%. Thus, the optimum point has not yet been reached. After the optimum point, the airports will enter an area where the level of quality is good, but there is a potential risk that the costs for quality increase without control through excessive investments into prevention and testing, i.e. through high costs of implementation and maintenance of quality systems, as well as through high costs of testing and control. After the optimum point, it is no longer necessary to push for investments through quality costs without proper review, since this would mean that the costs for quality could turn into costs for (non)quality. In the case that the costs for quality would be reduced by 5% 10%, and the costs for (non)quality would be less than 50%, the neutral zone would be reached. Since it is difficult to achieve the optimum point and a balanced relationship between the costs for quality and the costs from (non)quality at the level of 50%:50%, even a nearly balanced relationship can be considered a success. When a point of optimum quality

8 costs is reached, the airport achieves extra profits. At the same time the optimum point represents a suitable time to start new projects, and in the event that there are none, the operations around the optimum point should be ensured through continued controls. Undesirable scenario is that when the costs of (non)quality increase to more than 70%, and the costs for quality are less than 10%. This is an area of minimum quality, or the area of mandatory improvements, which should be achieved by investing in the quality through costs for quality and through a reduction of costs from (non)quality, thus reducing the overall costs of quality CONCLUSION Management of the airport system is a fundamental task of management. Since the airport management system is structured from necessary elements without which the system would not exist, and each of these structural elements depends on functioning of all other elements, the management is expected to be successful in coordinating the activities of all participants in the system. In doing so, the management must continually manage the organizational structure of the airport, the business processes and the human resources, in order to ultimately ensure a profitable business. In order to achieve established general and specific management objectives, a preference should be given to the process-oriented organization of airport and to the process approach to management because this concept allows for better understanding of customer/user requirements and better fulfillment of those requirements. Such approach requires a transformation of functional to process-oriented organization of an airport whose structure is based on business processes, while proving a process structure and process approach of an organization is evidenced by meeting the requirements of the International standard ISO 9001:2008. Management of a process-oriented airport means for the airport management and the management of processes to establish a dominant control over all process parameters and management systems. Process structure as a structural element of management system cannot exist without coordinated management of numerous interactions between different types of business processes. In doing so, it is not enough just to manage core business processes even through the result is directly confirmed by the market, but also to manage support processes, and processes of measurements, analyses and improvements. To measure, analyze and implement improvements is impossible without qualitative and quantitative data which are produced by a developed system for capturing quality costs as a component of total costs in airports. To make this possible, an airport needs to establish and implement a quality costs management system which will ensure adequate information for the management of business processes, expresses in qualitative and quantitative terms, so that decisions are based on facts. On one hand, this complex process requires appropriate documentation infrastructure that will be adequate for the needs of the airports, while on the other hand, the competence of employees has a decisive role in management of the quality costs. In doing so, especially significant is a development of a quality costs accounting and quality costs controlling which have a task to provide relevant and timely information to the management of business processes and management of the airport. Normative base for monitoring the quality costs is found in international standards: ISO 8402:1994, ISO :1994, ISO 10014:1995, ISO 9001:2008, ISO 9004: Miroslav Drljača, Small Encyclopedia of Quality Part V Quality costs, Oskar, Zagreb, 2004, p

9 Changes that will occur due to market liberalization of ground handling services will significantly affect the current way of operating airports, both in Croatia and in the EU member countries. Airports in Croatia should anticipate restructuring in a way that will enable an introduction of competition, particularly in the provision of ground handling services. In the newly found conditions of business operations, the competitiveness is manifested through the ability to meet the requirements of all stakeholders, while quality costs have a significant impact on the improvement of performance of the quality management systems through a measurement of the degree of reliability of business processes, customer/user satisfaction and consequently through better business results. 7. REFERENCES 1. Campanula, J., Principles of Quality Costs, Third Edition, ASQ Quality Press, Milwaukee, Wisconsin, USA, Drljača, M., Small Encyclopedia of Quality Part V Quality costs, Oskar, Zagreb, Drljača, M., Modeling of integrated management systems, Proceedings of the 11th Croatian Conference on Quality and 2th symposium innovative application quality, Croatian Society for Quality, Zagreb, Vodice, Drljača, M., The quality costs of airports, Collection of Papers XVIII. International Scientific Symposium Transport Systems 2011, Croatian Scientific Society for Transport, Vol. 1, Zagreb, Opatija, Central Bureau of Statistics, Croatian, statistical reports, Zagreb, ISO/TR Technical report, Guidelines for managing the economics of quality. 8. Quality management and quality assurance Vocabulary: ISO 8402:1994; EN ISO 8402: Regulation on airport charges NN 50/ Law on Airports, NN19/98.