AN EXAMINATION OF THE INDIRECT PRODUCTIVITY GAINS FROM QUALITY IMPROVEMENT

Abstract

Recent theoretical work suggests that quality‐improvement activities can yield significant indirect effects through process improvements and reduced factory congestion and confusion, benefits that are overlooked or hidden in most management accounting or cost of quality systems. Using time series data from two consumer durables manufacturing plants, I estimate the indirect productivity gains from quality improvement. The evidence from the plants indicates that the indirect effects from improved quality are at least two to three times the direct benefits attributable to lower scrap, rework, and inventory holding costs. An important implication of these findings is that companies that justify investments and measure performance based only on the direct costs of poor quality will motivate managers to make suboptimal decisions regarding quality‐improvement activities.