Examining market oriented aspects of cost of quality

Abstract

This paper examines the market-oriented aspects of cost of quality that have not been examined by current research. Using data from the automotive industry, we study the relationship between unit cost and economies of scale, experience curve effects, and imputed cost of quality in a specific context. Estimating these effects on unit cost explicitly has been problematic either due to unavailability of data or the imprecision of available data. Further, if a firm wishes to benchmark itself against its principal competitors along these cost dimensions, unavailability of data on competitors renders estimation impossible. In this paper, we propose and illustrate a method based on the iterative optimization of a dynamic model that has been presented in the literature. The results for a specific, illustrative case confirm the anticipated effects of experience curve advantages and economies of scale, lending validity to the proposed methodology. The results show that there is a positive relationship between unit cost and quality improvements; this possibility has also been raised by other researchers in the literature. The use of the methodology and implications for managerial use are discussed.