Pursuing Perfection Beyond the Acceptable Quality Level (AQL)

An ad promotes an Internet Service Provider’s (ISP) subscription plans.  On the bottom in small fine print is written “30% minimum speed at 80& reliability.”

The Philippines’ National Telecommunications Commission (NTC) in a memorandum in 2011 mandated that ISPs should provide at least 80% service reliability to customers: 

An ISP therefore should be able to provide an internet connection to its customers at or more than its minimum internet speed 80% of the time.  Or to put it another way, the ISP’s customers should be able to experience the minimum internet speed they signed up for 24 out of 30 days in a month.  If a subscriber does experiences the minimum speed six (6) days or faster in a month, the NTC considers the ISP’s service acceptable. 

The ISP is also required to tell its subscribers what the minimum internet speed is. In the ad mentioned above, the ISP informs customers that its minimum speed is 30% of what it advertises.  Thus, if a subscriber applies for a 300 Mbps plan, the ISP will guarantee a minimum speed of up to 90 Mbps.  An ISP is obliged to give only up to 30% of what the subscriber signs up for. 

Just imagine if this kind of advertising is applied in the fast-food industry.  A customer orders from a fast-food restaurant and the restaurant is guaranteed only to serve 30% of what’s on the menu.  If we order a 10-piece bucket of fried chicken, for example, and the fast-food gives you only up to three (3) pieces and the government allows it, we would surely be angry but we won’t be able to do anything about it. 

What the ISP advertises and what it actually serves evolves from the concept of the Acceptable Quality Level (AQL). 

The United States military adopted the Acceptable Quality Level (AQL) as a standard for inspection during the Second World War.  The idea is to set a level of what would be considered acceptable from a batch of items received from a vendor or a factory. 

For example, the US Army may accept a lot of 10,000 bullets if only up to fifty (50) of the bullets (AQL of 0.5%) are defective.  The US Army would be willing to pay for all 10,000 bullets even if it really would be able to use only 9,950 of them.  That doesn’t sound so bad unless you’re the soldier who ends up with the fifty (50) bad bullets. 

How AQLs are set varies from enterprise to enterprise, industry to industry.  Vendors would plead for higher AQLs if customers are buying items in very large lot sizes.  Sellers of small parts manufactured in large quantities like nails, wires, screws, and welding rods would ask for high AQLs as they would argue that defects are unavoidable and impossible to sort & separate all unconforming items. 

Customers, however, would discriminate what items deserve higher (looser) or lower (stringent) AQLs.  Customers would insist that how AQLs are set should depend on what the items would be used for.  For construction of a large warehouse, for instance, having a higher AQL for a large number of nails may be tolerable.  For owners of residential homes, however, they may not welcome a high AQL for nails or any construction material as this may result into a badly built house that can bring inconveniences if not hazards (e.g. a bad nail that leads to a collapsing ceiling). 

Food product manufacturers may accept higher AQLs for not-so-critical items like packaging materials but won’t welcome allowances for defective raw materials.  A food enterprise may accept a few imperfect boxes but I doubt it would accept even a few bad apples out of hundreds. 

And pharmaceutical firms won’t probably be too tolerant for high AQL’s for ingredients for medicines.

Utility firms apply AQLs in their services.  Electricity firms negotiate contracts with communities and try to convince consumers to accept a minimum level of power un-reliability, such as allowing for a number of days for a power plant to not supply electricity so that it can undergo maintenance.  Water companies try to get customers to agree on an acceptable quality of potability, to the extent notifying customers that the water they supply will not be fit for drinking anytime.    

In exchange for higher AQLs, enterprises sometimes offer discounts or defer price increases, from which they can position themselves as low-cost suppliers versus rivals.  In other words, customers can get products and services cheaply but they won’t get 100% quality. 

ISPs try to out-compete each other via this latter scenario.  Some offer the cheapest rates, advertise maximum speeds, but in the fine print guarantee only a minimum speed at a fraction of the time that is compliant to the law. 

Some ISPs will try to outdo the other such as by bumping up the minimum speed to 40% versus a rival’s 30%.  To the subscriber, however, he or she will never really get what they wish for from the advertising.

When ISPs advertise their maximum speeds, they reveal what they are capable of supplying to their subscribers.  But they also are insecure that their operations won’t run perfectly and reliably all the time.  Hence, they build in allowances to attain what they believe is an attainable level of performance which they can realistically provide to their subscribers. 

The problem with this kind of thinking is that it encourages complacency. 

The ISPs over time will won’t feel the need to improve the uptime of their broadband connectivity and to lengthen the time of their maximum service speed since they have the government’s blessing for an 80% reliability and a minimum speed that only requires notifying customers.  And they will continue to do so as long as rivals don’t try to up the game.

Many enterprises have over time accepted the AQL and said all right to accepting so many defects in the items or services they buy.  It becomes a standard that sometimes no one bothers to see if it can be improved.  If a factory is getting 95% acceptable product and its rivals are getting just the same, executives may not see the incentive to improve; after all, the factory is competitive at least for now. 

Up-and-coming competitors challenge established companies by bucking the AQL standard, by taking advantage of the complacency that take hold in established companies.  A new ISP company for instance may offer guaranteed minimum speeds of 80% (though they may lower the maximum speed advertised) at the same price as rivals.  

Competitors, the successful ones anyway, will claim to do better by offering better quality that improves from an industry’s AQL.  The real good ones would adopt continuous improvement that lead to zero defects. 

Acceptable Quality Levels (AQLs) were established to provide some reasonable standard in the inspection of items.  They weren’t meant to set the standards of quality; doing so only inspires complacency and encourages stagnancy. 

In a world where competitive disruption is more likely than ever, perfection in quality, via zero defects, is what we should pursue. 

About Overtimers Anonymous

How to Save Money When Renewing the Dreaded City Business Permit

Every time we enter a new year, many of us reflect on the past and make resolutions for the future. 

When the first working day arrives, however, we face reality. 

One of those realities is the dreaded city business permit renewal. 

Town and city governments in the Philippines require enterprises to register before they can conduct business in their areas of jurisdiction.  Renewing a business permit is mandatory by every third week of January of every calendar year.  It doesn’t matter if the business is big or small, profit or non-profit, every enterprise is required to register and renew their permits annually; there are very few exceptions

The responsibility to register falls mainly on the enterprise.  It’s one more task in an enterprise’s list of things-to-do to comply with the myriad of laws and regulations inherent in doing business in the Philippines. 

The city/town business permit is also known as the mayor’s permit.  To get one, whether new or renewed, the enterprise has to fulfil several prerequisites.  These include:

  • Clearance from a barangay or village;
  • Securing a sanitary permit;
  • Getting an environmental permit;
  • Showing a fire department permit;
  • Clearance from the city’s zoning office;
  • Paying & getting a community tax certificate.

Each prerequisite in turn has its own requirements to meet.  These include:

  • Proof of comprehensive general liability insurance coverage which is insurance to cover for anyone getting injured in an enterprise’s premises;
  • Physical medical examinations of the enterprise’ s employees including x-rays, blood tests, and doctors poking your people’s bodies;
  • A certificate from a licensed pest control exterminator certifying that there are no pests (insects not humans) in the enterprise’s premises;
  • A certificate from a national government agency that you’re complying with environmental laws.  If the enterprise is exempted, it would need to get a certificate that the enterprise is exempted or a certificate that one that does not need a certificate (yes, it’s red tape at its worst);

The enterprise would need to pay fees for each clearance and permit it secures.  The expenses can be hefty.  A community tax certificate can cost up to PhP 10,000 ($USD 200) which is significant for many small businesses.

When an enterprise presents all the clearances and permits to the city/town business permit & licensing office, it will then have to pay the local tax which is based on the enterprise’s sales and spend for fees such as:

  • Garbage fee;
  • Signboard fee (even if you don’t have a signboard);
  • Electrical & mechanical inspection fees;
  • Personnel inspection fees (fees to pay for the medical, police, occupational tax, and seminars of the enterprise’s employees no matter what topics they cover);
  • EPO accreditation fee (EPO is the environmental protection officer of the enterprise and the fee pays for the city’s accreditation or certification of that person);
  • Environmental inspection fee;
  • Sanitary inspection fee;
  • Fire inspection fee – local;
  • Fire inspection fee – national (enterprises pay for the local and national fire departments);
  • Engineering inspection fees.
Sample of a city’s fees other than the tax

These fees seem to cover all the costs of city hall and then some so one wonders where the taxes enterprises pay go to.    

Cities earn a lot of revenue from these business taxes and fees.  Yet, they don’t make it easy for enterprises to renew their permits and pay for them. 

It would take enterprises up to six (6) months if they are getting a business permit for the first time.  And it would come at great cost and time.  Cities and towns would require new businesses to undergo inspections (getting signatures from local agencies, engineers, and other authorities) and submit a lot of paperwork such as tax documents, business registration papers, as-built construction plans, and corporate licenses.  Note that these are requirements for new businesses.  The enterprise is applying for a permit to do business but has to first submit paperwork as if it has already been in operation for years. 

Renewing the business permit every January of every subsequent calendar year isn’t as lengthy but it is a hassle.  Renewing a permit is similar to getting a new one altogether.  One has to submit documents, fill out application forms, and go to one local agency after another to get a city officer to sign the forms saying the enterprise fulfilled its requirements but still is subject to inspection. 

Even if the city puts up what they call a “one-stop-shop” where all the agencies are located in one place, the enterprise’s representative still has to walk and stand in line at each agency’s desk.  The total distance of walking within a “one-stop-shop” can run up to several kilometres, not including the walking after the desk officer tells you that you need to photocopy more of the documents you submitted and you’d have to run outside to the nearest photocopier several hundreds of metres away which also has a line of people waiting. 

There is no value-added benefit in getting a business permit.  At least to the enterprise.  All the value goes to the city.  The enterprise does most of the work preparing & submitting documents and paying for all the taxes and fees for services which mostly one will never really see. 

It’s all part of compliance to laws and regulations that govern enterprises in the Republic of the Philippines.  One has to follow the processes and pay for them for the sake of building the nation and uplifting the lives of citizens (as to which citizens we don’t seem to have any business to know).  As the saying goes, “you can’t fight city hall.”

Enterprise executives delegate much of government compliance work to their employees, such as their bookkeepers, their in-house paralegals, and their administrative staff.  More often than not, compliance is not on an executive’s strategy list.  It is not a competitive priority

If at all, executives rather not spend time thinking about compliance, even so for bothersome local business permits at the start of a new year.  Executives would rather be busy on more so-called important things such as sales, operations, and investments. 

But whether they like it or not, compliance is a priority that executives should not outright ignore.  Because if and when they do, they can pay a high price.

Examples:

  • A city mayor shut down several businesses after inspection showed they were operating without permits;
  • A factory paid a heavy fine after it failed to prove it was complying with local environmental laws (it didn’t have a required bicycle rack and poster that showed the picture of the mayor saying there’s no smoking allowed in the premises);
  • A town billed a trucking company thousands of pesos for delivery vehicles that the latter did not disclose when it renewed its mayor’s permit;
  • A city zoning office refused to give clearance to an enterprise that was operating in a residential area where zoning laws didn’t allow business to be conducted.

We can avoid the unnecessary costs from business permit renewals not only by following procedures but also by looking out for some savings. 

For instance, some cities and towns offer discounts if an enterprise pays one full year’s worth of tax instead of remitting every three (3) months.  An enterprise saves not only from the discount but also from having to send staff to pay every quarter.  (Some cities negate this benefit when their agencies require the enterprises to renew certifications such as environmental & sanitary permits every quarter).

It’s sometimes worth it for an enterprise to examine what it pays for in a business permit.  For example, a commercial building for years has been paying a private company a monthly fee to take away the trash.  The building’s board of trustees realised later that it was paying thousands of pesos in garbage fees to the city.  When the board brought it up to the city sanitation office, the latter instructed the city’s trash hauler to pick up the trash.  The board then cancelled the contract with the private company and stopped spending for something already paid for with the city. 

Enterprise executives always like to enter any new year with confidence and initiative to grow their businesses.  Growth, however, entails meeting obligations such as renewing city permits at the start of every year.  It’s a hassle and it costs a lot but enterprises need to do it else they will pay more in fines or risk being closed down. 

Compliance is a must when it comes to laws and regulations but enterprises can avoid spending too much by examining what they’re charged for and availing of discounts when offered. 

Compliance comes with a cost but we don’t have to spend more than we should.

About Overtimers Anonymous