In manufacturing it has been common to make things to a standard. Provided things are above the lower tolerance and below the upper tolerance, they ‘pass’. But standards with tolerances means there will still be some variation.
In the 1950s Taguchi asserted that we should abandon standards with tolerances and, instead, choose any ‘nominal’ point on the continuum between upper and lower tolerances and then get to work on manufacturing items closer and closer to that nominal value, making things more and more alike.
This is the secret of world-class manufacturing, the continual reduction of variation means better quality and better performance.
Taguchi postulated a theory of economic loss: the further any item is from the nominal value, the greater the loss (cost) to the system.
In manufacturing things, the organisation would set the nominal value. Service differs from manufacturing. In service organisations it’s the customer who sets the nominal value.
The Taguchi loss function would predict that if we fail to meet the exact needs of any customer, we will incur losses. To put it in simple terms: we should design service to give customers what they want. And because customers come with a variety of needs, we need to design services to absorb that variety.