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.
AdlerP. S. (1990), “Shared Learning,”Management Science, 36, 8, 938–957.
2.
AmershiA. H. and DatarS. M. (1992), “Incomplete Contracts, Production Expertise and Incentive Effects of Modern Manufacturing Practices,” working paper, Stanford University.
3.
BankerR. D.DatarS. M., and KekreS. (1988), “Relevant Costs, Congestion and Stochasticity in Production Environments,”Journal of Accounting and Economics, 10, 3, 171–197.
4.
ChewW. B. (1986), Productivity and Change: The Short‐Term Effects of Investment on Factory Level Productivity, PhD dissertation, Harvard University.
5.
ColeR. E. (1983), “How to Gain the Competitive Edge: Improving Product Quality Through Continuous Feedback,”Management Review, 72, 10, 8–12.
6.
CookT. D. and CampbellD. T. (1979), Quasi‐Experimentation: Design & Analysis Issues for Field Settings, Rand McNally, Chicago, IL.
7.
DemingW. E. (1982), Quality, Productivity and Competitive Position, M.I.T. Center for Advanced Engineering, Cambridge, MA.
8.
FineC. H. (1986), “Quality Improvement and Learning in Productive Systems,”Management Science, 32, 10, 1301–1315.
9.
FineC. H. (1988), “A Quality Control Model with Learning Effects,”Operations Research, 36, 3, 437–444.
10.
GarvinD. (1988), Managing Quality, The Free Press, New York.
11.
GoldrattE. M. and CoxJ. (1986), The Goal, North River Press, Croton‐on‐Hudson, New York.
12.
HayE. J. (1988), The Just‐in‐Time Breakthrough, John Wiley & Sons, New York.
13.
HayesR. H. (1981), “Why Japanese Factories Work,”Harvard Business Review, 59, 4, 57–66.
14.
HayesR. H. and ClarkK. B. (1985), “Exploring the Sources of Productivity Differences at the Factory Level” in The Uneasy Alliance: Managing the Productivity‐Technology Dilemma, ClarkK. B.HayesR. H., and LorenzC. (eds.), HBS Press, Boston, MA, 151–188.
15.
HotardD. G. (1988), “Quality and Productivity: An Examination of Some Relationships,”Engineering Management International, 4, 259–266.
16.
IttnerC. D. (1993), “Exploratory Evidence on the Behavior of Quality Costs,” working paper, University of Pennsylvania.
17.
JacobsonR. and AakerD. (1987), “The Strategic Role of Product Quality”,Journal of Marketing, 51, 4, 31–44.
18.
KaplanR. S. and AtkinsonA. A. (1989), Advanced Management Accounting, 2nd ed., McGraw‐Hill, New York.
19.
KrafcikJ. F. (1988), “Triumph of the Lean Production System”,Sloan Management Review, 30, 1, 41–52.
20.
LandK. (1969), “Principles of Path Analysis” in Sociological Methodology, BorgattaE. F. (ed.), Jossey‐Bass, San Francisco. 3–37.
21.
LiC. C. (1975), Path Analysis: A Primer, Boxwood Press, Pacific Grove, CA.
22.
MarcellusR. L. and DadaM. (1991), “Interactive Process Quality Improvement,”Management Science, 37, 11, 1365–1376.
23.
MeffordR. N. (1989), “The Productivity Nexus of New Inventory and Quality Control Techniques,”Engineering Costs and Production Economics, 17, 21–28.
24.
NandakumarP.DatarS. M., and AkellaR. (1993), “Models for Measuring and Accounting for Cost of Conformance Quality,”Management Science, 39, 19, 1–16.
25.
PattersonJ. W. and EngelkemeyerS. (1989), “A Company Cannot Live By Its Quality Alone,”Quality Progress, 22, 8, 25–27.
26.
PhillipsL.ChangD., and EngelkemeyerS. (1983), “Product Quality, Cost Position and Business Performance: A Test of Some Key Hypotheses,”Journal of Marketing, 47, 2, 26–43.
27.
SchmennerR. W. (1988), “Behind Labor Productivity Gains in the Factory,”Journal of Manufacturing and Operations Management, 1, 323–338.
28.
SchmennerR. W. and CookR. (1987), “Explaining Productivity Differences in North Carolina Factories,”Journal of Operations Management, 5, 273–289.
29.
TapieroC. S. (1987), “Production Learning and Quality Control”,IIE Transactions, 19, 4, 362–369.
30.
United States General Accounting Office (1991), Management Practices: U.S. Companies Improve Performance Through Quality Efforts, U.S. Government Printing Office, Washington, DC.
