International Journal of Quality & Reliability Management

Is quality still free? – Empirical evidence on quality cost in modern manufacturing

Markus Plewa Gernot Kaiser Evi Hartmann
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Markus Plewa Gernot Kaiser Evi Hartmann , (2016),"Is quality still free? – Empirical evidence on quality cost in modern
manufacturing", International Journal of Quality & Reliability Management, Vol. 33 Iss 9 pp. -
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 Is quality still free? – Empirical evidence on quality cost in modern
manufacturing

1. Introduction
“Quality is free” (Crosby, 1979) is one of the mantras repeated by Total Quality Management
(TQM) implementers. Nevertheless, Cost of Quality (CoQ) was found to account for 5% to 25%
of sales revenue (Williams et al., 1999). Therefore, for practitioners, quantifying the cost of
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adhering to quality is a requirement for a thorough implementation of TQM. To help better

understand this cost, academics set out to define CoQ and its components, collect relevant data
and analyze it in theoretical models, case studies and simulations.

This study provides empirical evidence for either variant of two contesting CoQ modelling
approaches by posing two key questions. First, is the total CoQ lower at higher levels of overall
quality so that at ever higher levels of quality the cost related to quality can be reduced? Second,
is lower failure cost only observed when prevention and appraisal costs are higher? To address
these, we conduct an explorative approach using regression analysis on a large sample of 286
observations from a homogeneous sample of manufacturing industry branches. To assess CoQ
and its components weighted by sales volume, we use a high-level quality measure of customer
satisfaction, which also covers incidents of external failure.

This paper is structured as follows. Section 2 provides a literature review and background for the
motivation of the study. Section 3 postulates the research hypotheses. Section 4 describes and
discusses our methodology and data. In section 5 we provide results of the analysis and discuss
them. The conclusion and implications close the paper.

2. Literature review and background

Several literature reviews on CoQ have been published. An early review of the literature on
quality-related cost was published in the late 80s (Plunkett and Dale, 1987). Later, Williams et al.
(1999) composed a comprehensive summary of the origins and developments of CoQ research,
reviewing the topic’s relevance and practical issues of collecting and analyzing CoQ data. A
more recent overview of the existing literature was conducted by Schiffauerova and Thomson
(2006).
 In general, research in the field of CoQ is divided into four categories. First, there are conceptual
papers that advance theoretical modelling and definitions of CoQ (Yang (2008) is a recent
contribution). The second category encompasses industry studies based on smaller samples,
each exploring different aspects of CoQ (e.g. Tye et al., 2011; Sower et al., 2007 and Uyar
2008). The third comprises numerous case studies, some of which include (short) time series
analysis. Schiffauerova and Thomson (2006) provide an overview of the many papers published.
Finally, there are a number of simulation exercises on quality cost dynamics using mathematical
models. Burgess (1996) and Chiadamrong (2003) are influential publications in this category,
while Omar and Murgan (2014) is the most recent. Castillo-Villar et al. (2012) provide a static
model for a supply chain perspective on quality cost. Some of the above-mentioned and of
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course many other contributions combine two of these approaches. This paper contributes to the
first and second categories.

Different models have been developed to describe CoQ. Schiffauerova and Thomson (2006)
review those most common in the literature. They observe that the prevention-appraisal-failure
(PAF) model is the most closely studied by researchers and the most commonly used in
practice. It divides CoQ into the categories of prevention, appraisal and (internal and external)
failure cost. As an extension to the PAF model, intangible and opportunity costs have been
added. They account for profits not realized from customers lost due to quality issues but are
difficult to quantify (e.g. Cheah et al., 2011). Crosby (1979) more generally only distinguishes the
price of conformance and the price of non-conformance. Moreover, the Process cost model
together with Activity-based costing specifies an alternative to the PAF model (see Khataie and
Bulgak (2013) for a recent contribution).

Despite the predominant use of the PAF model, several publications have criticized the PAF
model, including Plunkett and Dale (1988), one of the early and influential papers to do so.
Nevertheless, the same authors (Plunkett and Dale, 1987) and others (e.g. Schiffauerova and
Thomson (2006) in their recent review) also acknowledge practitioners and researchers’
preoccupation with this model. Therefore, the data available for empirical studies most likely
adhere to the prevention-appraisal-failure model.

Within the framework of the PAF model, different definitions of CoQ and its components have
been proposed. The British Standard 6143-2 (British Standards Institute, 1990) as well as the
American Society for Quality Control (ASQC, 1971) provide guidelines. Sower et al. (2007)
quote Campanella (1990) to provide a common understanding for those definitions: Prevention
costs are defined as “the costs of all activities specifically designed to prevent poor quality in
 products and services” (p. 22), whereas appraisal costs are “the costs associated with
measuring, evaluating, or auditing products or services to assure conformance to quality
standards and performance requirements” (p. 23). Failure costs are defined as “the costs
resulting from products or services not conforming to requirements or customer/user needs
(which) occur prior to delivery or shipment [...] to the customer” (p. 23) (internal failure) or which
“occur after delivery or shipment of the product, and during or after furnishing of a service to the
customer” (p. 23) (external failure). Very similar definitions are given by the German norm DIN
55350 (German Institute for Standardization, 2008, and earlier versions, [1]). A comprehensive
discussion on defining CoQ and its components has been published by Dale and Plunkett (1999,
p. 47-66).
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A graphical representation of the PAF model is straightforward. Total CoQ and its components
are depicted in a diagram with the quality level on the horizontal and CoQ on the vertical axis. Of
course, the total CoQ curve is the result of stacking the curves of its components on top of each
other. The classical trade-off in the PAF model was described by Juran (1962). The original
model postulates that higher quality levels require exponentially higher prevention and appraisal
spending while failure cost decreases. This implies a minimum of total CoQ at a quality level
below perfection (Figure 1, left-hand side). Castillo-Villar et al. (2012) show in their model how
the original view of quality cost can prevail in a static setup of a supply chain model.
Schiffauerova and Thomson (2006) list a number of publications that contest these views. These
claim that prevention costs increase, though not exponentially, towards higher quality levels, and
adapt the original PAF model accordingly (Figure 1, right-hand side). In the modern version a
dynamic aspect is covered: Many preventive actions incur one-off cost but avoid failure cost
thereafter. Due to continuous improvement, remedies for defects are implemented; prevention
and appraisal costs do not increase exponentially to achieve higher quality levels. As a result, in
the modern model, total quality cost is lowest at zero defects. At this minimum of total CoQ, very
low (internal) failure costs remain together with a necessary level of prevention and appraisal
costs.

The original PAF model version is seen as correct for a current and static representation of CoQ;
however, considering the fact that companies improve and learn from mistakes, the modern
variant is prevalent in current literature (Burgess, 1996; and others).

Include Figure 1 here

Despite the many case studies conducted on CoQ within individual companies and across the
globe, there is surprisingly little empirical evidence for the explanatory power of either variant of
 the PAF model using a high-level quality metric like customer complaints as a basis for
comparison. While several industry studies (e.g. Ittner, 1996; Sower et al.; 2007; Uyar, 2008)
use medium-sized samples, none of these rely on a high-level quality metric to assess
implications of the theoretic models.

The perception that customers are the driver of quality-related efforts in management traces
back to the very beginning of CoQ research (Feigenbaum, 1956). Dale et al. (2007)
acknowledge that “satisfying customers and creating customer enthusiasm through
understanding their needs and future requirements is the crux of TQM, and all organizations are
dependent on having satisfied customers” (p. 10). This idea is reflected to the present day in
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quality cost case and industry studies that refer to customer complaints and customer
satisfaction (e.g. Uyar, 2008 and Cheah et al., 2011). In survey-based studies, customer
satisfaction is often included but then only ranked according to a Likert scale (Jitpaiboon and
Rao, 2007). More exact than those indirect approaches is the use of data on customer
complaints. The frequency of customer complaints represents a high-level measure of an
organization’s quality performance because it measures external quality performance, directly at
the customer, where quality performance matters most. This is particularly relevant for our study,
as we focus on the manufacturing business where the vast majority of sales are to other
businesses. End-consumers would be prone to simply switch without filing a complaint, while
changing a supplier is much more of an effort in manufacturing due to substantially longer-term
customer relationships and contracts.

Against this backdrop, this study investigates whether there is empirical support for either the
original or the modern version of the PAF model (Figure 1). We use a unique dataset with 286
observations from a homogeneous manufacturing industry to clarify whether either version of the
model has explanatory power on an aggregate level.

3. Research hypotheses
To begin with, we formulate hypotheses that help discover evidence for either variant of the PAF
model. We proceed by grouping the hypotheses into four categories. The first is related to total
CoQ, the second to the CoQ components. Then we focus on the relationship between total CoQ
and its components. Finally, we analyze the relationships between the CoQ components.
 To clarify whether we can support the original quality cost model, we check for a significant
higher order relationship between total quality cost and overall quality level, represented by the
U-shaped total quality cost curve in the original model (Figure 1, left-hand side).

H1a: Total CoQ is associated with overall quality level by a convex, U-shaped relationship.

It could be reasonable to think that companies existing in the market do not produce at quality
levels below a certain quality acceptance threshold. In case we only observe data points on
quality levels to the right of the total CoQ minimum, we test whether higher total CoQ is
associated with higher quality levels. A positive association between total CoQ and overall
quality level provides evidence for the original PAF model (Figure 1, left-hand side). On the
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contrary, a significant negative relationship supports the modern view (Figure 1, right-hand side)
and rejects the original version of the model. This leads to our next hypothesis.

H1b: Lower total CoQ is associated with higher overall quality levels.

A similar hypothesis can be formulated for the components of total quality cost. However, they
only have limited strength in distinguishing between the two versions of the PAF model. Still,
these hypotheses are useful to check whether there is explanatory power at all in either version:
Both versions of the model propose that lower failure cost should be observed at higher levels of
quality. Accordingly, we formulate our third hypothesis.

H2a: Lower failure cost is associated with higher overall quality levels.

Equivalently, both model versions state that higher prevention and appraisal costs should be
observed with higher quality levels. However finding evidence for exponentially higher
prevention and appraisal costs rather supports the old notion of the model (Figure 1, left-hand
side), while a linear relationship would support the modern view of the PAF model (Figure 1,
right-hand side).

H2b: Higher prevention and appraisal costs are associated with higher overall quality levels.

Moreover, according to the original version of the model (Figure 1, left-hand side), total CoQ is
high when prevention and appraisal costs are observed both low and high, with lower total CoQ
at intermediate values of prevention and appraisal costs. In other words, the original version of
the model predicts a convex, U-shaped relationship between total CoQ and prevention and
appraisal costs. The same relationship should also be the case for failure cost and total CoQ
according to the original version of the model.
 H3a: Total CoQ is associated both with prevention and appraisal costs as well as with failure
cost by convex, U-shaped relationships.

For completeness, we formulate a similar hypothesis to test the validity of the modern version of
the model (Figure 1, right-hand side). To support the modern version we should find a negative
relationship between total CoQ and prevention and appraisal cost components, as well as a
positive relationship between total quality cost and the failure cost component.

H3b: Lower total CoQ is associated with lower failure cost and higher prevention and
appraisal costs.
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Finally, ensuring the suitability of both versions of the model, we test whether the share of failure
cost in total quality cost diminishes at higher levels of overall quality.

H4a: A lower share of failure in total quality cost is associated with higher overall quality
levels.

With the same motivation, we test for a negative relationship between prevention and appraisal
costs on the one hand and failure cost on the other. A negative association is predicted by both
versions of the model (Figure 1). This leads to our last hypothesis.

H4b: Lower failure cost is associated with higher prevention and appraisal costs.

4. Methodology
We set out to provide evidence for the above-stated hypotheses by employing standard
regression analysis. Thereby we test for linear as well as non-linear relationships. For the latter
we not only include higher order terms in linear regressions but also test for an exponential
relationship by conducting log-log regressions. We use these regressions in order to assess the
magnitude of the hypothesized correlations and check for evidence of non-linearity. Due to the
nature of the data set, the identification of causal effects is not part of our study. Nevertheless,
we double-checked the significance of the parameters in regressions with heteroskedasticity
robust standard errors. Also, as we mostly conduct linear regressions with one explanatory
variable, multicolinearity cannot be an issue. Not interpreting the value of the estimated
coefficient, independence of residuals is not a necessary assumption either. As a result, careful
interpretations of the regression outcomes are possible in order to confirm or contrast theoretical
 modelling. Notably, we do not interpret the estimated value of coefficients but only their
significance and sign.

This study relies on a unique data set, two characteristics of which are important features of
secondary data analysis: First, the team of researchers conducting this study was not involved in
collecting the data (avoiding interviewer bias). Second, the topic of quality cost was only one of
many topics included in the questionnaire (avoiding common method bias). It was collected
using a questionnaire survey approach. Supply chain, production and operations managers as
well as executive officers were targeted mainly by announcements in a professional magazine.
Participants actively decided to participate themselves. As part of a comprehensive
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questionnaire they were asked to provide annual data for quality cost. The CoQ data was
collected with reference to the German norm DIN 55350. On the questionnaire, quality costs
were defined to include labor costs directly attributable to quality activities. Prevention costs
encompass training, vendor certification, audit, Failure Mode & Effect Analysis, and Root Cause
Failure Analysis. Appraisal costs include inspection of work in progress and finished goods, line
technicians, test equipment, lab analysis, and related administration. Failure costs include both
internal failure (cost of scrap, rework, waste, etc.) and external failure (costs of warranty,
returned material, and administrative expenses). Moreover, they were asked to provide figures
of the sales volume as well as the share of orders with customer complaints. An individual
evaluation of the participant’s relative position compared to other participants served as a
participation incentive. Participants were not aware of further academic use in general, or focus
on quality cost data in particular. Being drawn from managerial accounting, quality cost data
constitutes manifest variables and hence do not require the procedure for Likert-scale based
items to construct latent variables.

CoQ was reported in absolute annual terms in Euros on the questionnaire. Following the
common practice of most case studies on the subject, we standardize CoQ by dividing them by
net sales of the establishment. In the sample, total CoQ averages at 2.7 percent of net sales.
This is at the lower end of ranges reported by Tye et al. (2011) and Williams et al. (1999). On
average 19.3 percent of total CoQ is for prevention; 32.8 and 47.8 percent account for appraisal
and failure costs respectively. These findings compare well to those in the studies referred to
above. Net sales average at €184 million and range from €2.8 million to €2.1 billion, while
employees average at 681 and range from 32 to 4,148.

The overall quality measure we use for testing the stated hypotheses is the share of orders
without customer complaints. This represents an annual figure of a high-level quality measure
 which comprises all incidents that pertain to overall quality performance. In those characteristics,
the share of orders without customer complaints corresponds well to annual sales figures as well
as the annual cost of quality data, which are high-level, annual aggregates themselves.
Henceforth, we refer to the share of orders without customer complaints as overall quality level.
It has been observed at or above 90% only, with an average of 99.04%.

Sower et al. (2007) validate the use of self-reported CoQ data: We adopt their assumption of
external validity of their test for inter-rater reliability. Sower et al. (2007) obtained two reports of
CoQ per factory, but only for a small subsample of their data set. They establish that in this
subsample the two paired reports correlate significantly and hence use the full sample of self-
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reported quality cost data. Together with the advantage of conducting a secondary data
analysis, this lends confidence to the use of self-reported quality cost data in this study.

Some publications however raise concerns about the validity of an inter-company comparison of
CoQ data (e.g. Dale, 2007; Williams et al., 1999). Nevertheless, four striking arguments affirm
that this data set can be used to conduct regression analyses to report on the above-stated
hypotheses. First, a common standard for the definition of CoQ components was used – that is
DIN 55350 as introduced above. Secondly, participants form a homogenous group from a
narrow range of industry branches. Survey participants were from the manufacturing industries
of electrical equipment, machinery and other equipment, motor vehicles, trailers and semi-
trailers, as well as other transport equipment (ISIC Divisions 27-30, United Nations publication,
2008). All of them are manufacturing facilities of German companies. Thirdly, in this study we
utilize the quality cost data that was provided in a total of 286 observations. The large sample
size builds trust in drawing conclusions from regression analysis. Finally, all questionnaires were
thoroughly manually checked for consistency upon reception. Personal inquiries were made by
phone or e-mail in case of doubts about the data in submitted questionnaires.

Since the dataset was collected over a relatively long period of time (see Table I), we used
common statistical testing methods to confirm that there was no relevant structural change over
the time of data collection: We verified that pooling observations does not hide variance that
could be explained by effects within the year groups. First, we conducted the ANOVA-test for
both total CoQ and overall quality level across the years. Next, we conducted the MANOVA-test
for the joint distribution of Total CoQ and overall quality level across the years. Finally, to ensure
validity in the case of potential non-normality, we also conducted the two non-parametric
Kruskal-Wallis- (Kruskal and Wallis, 1952) and Jonckheere-Terpstra-tests (Terpstra, 1952;
Jonckheere, 1954) for both total CoQ and overall quality level across the years. None of these
 tests indicate – even at loose significance levels of 10% – that the year groups do not stem from
a common distribution. Appendix 1 provides details on the test statistics.

Include Table I here

5. Regression analysis and discussion

Following this description of dataset and methodology, we test each of our hypotheses to
provide evidence for or against them. Subsequently, we discuss the results.

Hypotheses 1
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First, we test the hypotheses 1a and b related to total CoQ and overall quality level: “Total CoQ
is associated with overall quality level by a convex, U-shaped relationship (H1a)”, and “Lower
total CoQ is associated with higher overall quality levels (H1b)”. To explore potential linear and
non-linear relationships between the two variables, Table II provides results for different
regressions.

Include Table II here

The hypothesized higher order relationships (regression #2 and #3) do not yield parameter
estimates significantly different from zero. The magnitude of the coefficient in the logarithmized
regression (#4) is weakly significantly different from zero. However, a U-shaped relationship
would be supported by coefficients with a magnitude of larger than unit value. The negative
coefficient in combination with the intercept indicates a negative relationship of total CoQ within
the relevant domain of overall quality (larger than zero, smaller or equal to 100). Therefore, we
do not find support for a U-shaped relationship between overall quality level and total quality
cost. The variance is best explained in the simple linear regression (#1), which yields a strongly
significant negative coefficient. With these results, we confidently reject hypothesis H1a, since a
significant negative linear relationship rules out the possibility of a U-shaped convex relationship.
At the same time, we find evidence in support of hypothesis H1b. These results provide
important evidence against the original version of the model (Figure 1, left-hand side) and
support the modern view (Figure 1, right-hand side).

Hypotheses 2
Let us now turn to the hypotheses on the quality cost components and overall quality. Regarding
failure cost, both variants of the model predict that “Lower failure costs are associated with
 higher overall quality levels” (H2a). Table III provides results for the linear regression (#1), using
higher order terms (#2, #3) and logarithms (#4).

Include Table III here

Fitting higher order terms does not yield coefficients significantly different from zero. Results of
regression #1 and #4 however indicate a significant negative association of failure cost with
overall quality level. This is directly indicated by the coefficient for the linear relationship. For the
regression in logarithms, we additionally have to consider the relevant domain of overall quality
again (larger than zero, smaller or equal to 100). Within this interval, the coefficients pick up a
monotone negative relationship. Therefore, both regressions (#1 and 4) provide evidence in
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support of Hypothesis H2a, which is in line with both variants of the model.

The logical next step is to test whether “Higher prevention and appraisal costs are associated
with higher overall quality levels” (H2b). The F-statistics of the regressions equivalent to those
conducted for failure cost indicate that these are not valid for prevention and appraisal costs.
(Details of these regressions are provided in Appendix 2. Table IV exemplarily provides the
estimates for linear regressions.) This means that we do not find significant relationships
between appraisal and failure costs and overall quality level. Consequently, we do not find
evidence for the validity of Hypothesis H2b in this particular analysis. This is problematic
especially for the support of the original version of the model (Figure 1, left-hand side), which
predicts an exponentially positive relationship between prevention and appraisal costs and
overall quality level.

Include Table IV here

Hypotheses 3
As a next step, we postulated two hypotheses on the relationship between total CoQ and its
components. For the original version of the model (Figure 1, left-hand side), we would expect
that “total CoQ is associated both with prevention and appraisal costs as well as with failure cost
by a convex, U-shaped relationship (H3a).” However, to support the modern version of the
model (Figure 1, right-hand side), we would expect that “Lower total CoQ is associated with
lower failure cost and higher prevention and appraisal costs (H3b).” Table V summarizes
regressions with linear and non-linear settings to test these hypotheses.

Include Table V here

 Considering the relevant interval of the cost components (between zero and one), we do not find
evidence for a U-shaped relationship (Table V, regressions #2-4 and #6-8). The higher order
terms and the logarithmic regressions only pick up the linear relationship that we test for with
regressions #1 and #5. These two indicate a highly significant linear relationship. All together we
find strong evidence for a positive linear relationship between total CoQ and both prevention and
appraisal costs as well as failure cost. Hence we do not find support for hypothesis H3a and thus
for the original version of the model (Figure 1 left-hand side). A clear rejection of the original
version of the model is not possible with this result: It may be the case that we only observe data
points on the left part of the U-shaped curve between total CoQ and prevention and appraisal
costs, and, equivalently, it may be the case that we only observe data points on the right part of
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the U-shaped curve between total CoQ and failure cost.

However, we do find support for hypothesis H3b regarding failure cost. It behaves in the
hypothesized way (regression #5, also indicated by regressions #6-8), supporting the new
version of the model. But we have to reject hypothesis H3b for a negative relationship between
total CoQ and prevention and appraisal costs. Instead, we find significant evidence for a positive
association (Table V, regression #1, also indicated by regressions #2-4). This last finding is not
in line with any of the two versions of the common PAF model (Figure 1).

Hypotheses 4
To check the explanatory power of either version of the model (Figure 1), we hypothesized that
the share of failure cost in total CoQ is lower at higher overall quality levels (H4a). We found
significant evidence supporting this hypothesis (Table VI, regression #1). At higher levels of
overall quality, the distribution of CoQ shifts towards higher shares of prevention and appraisal
and lower shares of failure.

Moreover, we hypothesized that we would find a negative relationship between failure cost and
prevention and appraisal costs (H4b), again in support of both versions of the model. On the
contrary, regressions #2 and #3 (Table VI) indicate a significant positive association between
failure cost and prevention and appraisal costs. In the light of this evidence we have to reject
hypothesis H4b: We do not observe lower failure cost when we observe higher prevention and
appraisal costs. This again is not in line with any of the two common representations of the PAF
model (Figure 1).

Include Table VI here

Discussion
 To sum up the findings from our testing strategy: On the one hand, we gathered evidence that
refutes the original version of the model. Clearly, total CoQ were observed to be lower at higher
levels of overall quality instead of exponentially higher (H1a/b). We also did not find a positive
association between prevention and appraisal costs and overall quality levels (H2b). There is no
direct evidence for the convex U-shaped relationship between total CoQ and its components,
which we would expect (H3a/b). Finally, the CoQ components are not negatively associated with
each other (H4b).

On the other hand, we only found mixed evidence for the modern view: Total CoQ is observed to
be significantly lower at higher levels of overall quality (H1b). This finding speaks for the validity
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of the modern version. However, we did not find support for increasing prevention and appraisal
costs (H2b) as predicted by the model. Furthermore, we do not find evidence for a negative
relationship between total CoQ and prevention and appraisal costs (H3b). On the contrary, we
observe that lower prevention and appraisal costs are significantly associated with lower total
CoQ. Finally, the CoQ components are not negatively associated with each other (H4b). These
findings speak against the validity of the modern version.

Given these results, we now look into the theoretical model again. One modification of the
modern model emerges from our findings. This is depicted in Figure 2: This model suggests that
prevention and appraisal costs initially increase to achieve higher overall quality levels, peak at a
certain quality threshold (A in Figure 2) beyond which they decline again. Our empirical findings
would be in line with this representation, assuming that we only observe quality levels beyond
threshold A (Figure 2). This seems plausible as the range of quality levels observed is above or
equal to 90%.

Include Figure 2 here

The literature provides indications for this modification. Ittner (1996) found evidence for lower
failure cost with little or no increase in prevention and appraisal costs. He points out that this is in
line with the continuous improvement viewpoint. This implies that errors that initially cause failure
cost will trigger corrective action once detected so that quality level increases afterwards. This
decreases the breadth of possible failure sources so that appraisal cost falls with higher overall
quality levels. The same logic applies to prevention cost, for example, in regard to supplier
quality. Cost for preventive measures in supplier qualification will decrease once standards are
established. Moreover, Freiesleben (2004) points to the unit cost logic, which implies that
appraisal and prevention costs are distributed across more (non-defective) units sold, which
again supports the idea of decreasing prevention and appraisal costs (per sales). Using a
 simulation approach based on real-life manufacturing data, Omar and Murgan (2014) find
evidence for lower CoQ in total and its components at higher quality levels. Also, the British
Standard 6143-2 (British Standards Institute, 1990) points in this direction. The static modeling
setup by Castillo-Villar et al. (2012) focuses on different aspects and does not provide a channel
for lasting effects of continuous improvement. Consequently, they do not necessarily find
evidence for falling prevention and appraisal cost at higher quality levels.

6. Conclusion and implications

To answer the question we pose in the title of this study, we confirm: yes, quality is free. Our
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sample of 286 observations provides substantial evidence that total CoQ is lower at higher levels
of overall quality. Failure cost diminishes at higher overall quality levels, while prevention and
appraisal costs are not observed to be significantly higher at higher overall quality levels.

Our structured testing strategy based on an extraordinarily large sample of secondary data
provides evidence for a modification of the current view of how to represent CoQ in the PAF
model. With confidence we support the view that at higher overall quality levels, CoQ is lower
not only in total but also in its components. At the high levels of overall quality that we observe in
our sample, the notion of lower failure cost being achieved at the expense of higher prevention
and appraisal costs is hence superseded.

Of course, the quality cost records used in this study only represent a snapshot observation of
the current status of the manufacturing unit. Any analysis presented here is based on
correlations only. We have not set out to prove causalities, as this is beyond the possibilities of
this cross-sectional approach. Nevertheless, given the large sample at hand with its
homogenous origin, we confidently conclude that substantial savings in CoQ are possible when
reaching higher overall quality levels. The important management implication of these findings is
that higher levels of quality do not necessarily require increased spending on prevention and
appraisal.

Against this backdrop, beneficial further research could focus on the effectiveness of specific
elements of prevention and appraisal cost. It would be beneficial to examine which elements
have most favorable effects on failure cost, opposed to which elements have least impact.
Moreover, it would be interesting to further detail for specific levels of actual quality performance,
on which elements practitioners should focus upon, in order to further improve most effectively.
Real life quality cost data can provide detailed insight in these contexts.
 The methodology employed was successful in revealing significant results. This encourages
further large sample factory-level analysis of secondary data, in the field of quality management
or elsewhere in operations management.

Footnotes
1. http://www.nqsz.din.de/cmd?artid=106337492&bcrumblevel=1&contextid=nqsz&subcommitte
eid=54748179&level=tpl-art-detailansicht&committeeid=54739099&languageid=en (accessed
October 10th, 2014)
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Appendix 1

ANOVA-test on total CoQ

Hypothesis: The means of total CoQ in the year groups are equal.

Result: Hypothesis cannot be rejected at common significance levels.

Include Table VII(a) here

 ANOVA-test on overall quality level
Hypothesis: The means of overall quality level in the year groups are equal.

Result: Hypothesis cannot be rejected at common significance levels.

Include Table VII(b) here

MANOVA test for group-dependence of joint distribution of overall quality level total CoQ
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Hypothesis: The joint distribution of total CoQ and the overall quality measure in the year groups
are equal.

Result: Hypothesis cannot be rejected at common significance levels using the four given test
statistics.

Include Table VII(c) here

Kruskal-Wallis test on total CoQ

Hypothesis: The distributions of total CoQ in the year groups are equal.

Result: Hypothesis cannot be rejected at common significance levels.

Chi-squared test statistic: 10.807 with 12 degrees of freedom

Probability: 0.5456
Chi-squared test statistic with ties: 10.807 with 12 degrees of freedom
Probability: 0.5456

Kruskal-Wallis test on overall quality level

Hypothesis: The distributions of overall quality level in the year groups are equal.

Result: Hypothesis cannot be rejected at common significance levels.

Chi-squared test statistic: 14.850 with 12 degrees of freedom

Probability: 0.2497
Chi-squared test statistic with ties: 14.878 with 12 degrees of freedom
 Probability: 0.2482

Jonckheere-Terpstra test on total CoQ

Hypothesis: The distributions of total CoQ in the year groups are equal.

Result: Hypothesis cannot be rejected at common significance levels.

Test statistic: J = 19988

J* = 1.526 (corrected for ties)
Pr(|Z| > |J*|) = 0.1271 (ordered alternative in either direction)
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Jonckheere-Terpstra test on overall quality level

Hypothesis: The distributions of overall quality level in the year groups are equal.

Result: Hypothesis cannot be rejected at common significance levels.

Test statistic: J = 18139.5

J* = -0.771 (corrected for ties)
Pr(|Z| > |J*|) = 0.4408 (ordered alternative in either direction)

Appendix 2
Include Table VIII here
 About the Authors

Markus Plewa is a Research Assistant at the Chair of Supply Chain Management at the
Friedrich-Alexander-University of Erlangen-Nuremberg (Germany). His research interests focus
on operations management and industrial economics.

Dr Gernot Kaiser is a Professor for Logistics and Supply Management at the University of
Applied Sciences of Nordhausen (Germany). His primary areas of research interest include
behavioural operations management, supply chain integration, and inventory management. He
has published in the International Journal of Integrated Supply Management, Journal of
Operations Management, and other managerial and academic outlets.
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Dr Evi Hartmann is a Professor for Supply Chain Management at the Friedrich-Alexander-

University of Erlangen-Nuremberg (Germany). Her primary areas of research interest include
operations management, supply chain management and global sourcing. She has published in
the International Journal of Physical Distribution and Logistics Management, Journal of Business
Logistics, Journal of Supply Chain Management, International Journal of Production Economics,
Journal of World Business, and other managerial and academic outlets.
 Figure 1: Classical model on the left, modern model on the right (see Schiffauerova and Thomson,
2006)
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Figure 2: Modification of the modern model

 Table I.

Distribution of observations

2000 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 Total

14 16 21 21 25 29 28 29 29 28 16 16 14 286

Table II.

Regressions related to hypotheses 1a/b

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n=286 #1 Total CoQ #2 Total CoQ #3 Total CoQ #4 Log Total CoQ

Quality level -0.0021*** -0.0121 3.7586

Quality level squared -0.0000 -0.0393

Quality level cubed 0.0001

Log Quality level -6.3406*

Constant 0.2358*** 0.7203 0.0001 25.1548

R-Squared 0.0235 0.0236 0.0293 0.0114

Prob > F-Stat 0.0095*** 0.0340** 0.0385** 0.0715*

Note: ***Significant at 0.01 level; **significant at 0.05 level; *significant at 0.10 level

Table III.

Regressions related to hypotheses 2a/b

n=286 #1 Failure cost #2 Failure cost #3 Failure cost #4 Log Failure cost

Quality level -0.0019*** -0.0399 -0.4152

Quality level 0.0001 0.0041

squared
Quality level cubed -0.0000

Log Quality level -12.4304***

Constant 0.2053*** 2.0333* 13.9938 52.2614***

R-Squared 0.0701 0.0775 0.0777 0.0328

Prob > F-Stat 0.0000*** 0.0000*** 0.0000*** 0.0021***

Note: ***Significant at 0.01 level; **significant at 0.05 level; *significant at 0.10 level
 Table IV.

Regressions related to hypotheses 2a/b, cont.

n=286 #1 Prevention plus Appraisal costs #2 Prevention cost #3 Appraisal cost

Quality level -0.0001 -0.0002 0.0001

Constant 0.0304 0.0345 -0.0041

R-Squared 0.0003 0.0055 0.0004

Prob > F-Stat 0.7713 0.2113 0.7357

Note: ***Significant at 0.01 level; **significant at 0.05 level; *significant at 0.10 level
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Table V.

Regressions related to hypotheses 3a/b

n=286 #1 Total CoQ #2 Total CoQ #3 Total CoQ #4 Log Total CoQ

P+A cost 1.2641*** 1.5225 *** 1.5448***

P+A cost squared -2.9527*** -3.5969

P+A cost cubed 3.5548

Log P+A cost 0.7666***

Constant 0.0088*** 0.0064*** 0.0063*** -0.3264***

R-Squared 0.7474 0.7585 0.7585 0.7602

Prob > F-Stat 0.0000*** 0.0000*** 0.0000*** 0.0000***

n=286 #5 Total CoQ #6 Total CoQ #7 Total CoQ #8 Log Total CoQ

Failure cost 1.4331*** 1.9545*** 2.3480***

Failure cost squared -8.8361*** -23.6472**

Failure cost cubed 119.306

Log Failure cost 0.7627***

Constant 0.0088*** 0.0050*** 0.0032 -0.2748**

R-Squared 0.5858 0.6075 0.6107 0.7755

Prob > F-Stat 0.0000*** 0.0000*** 0.0000*** 0.0000***

Note: ***Significant at 0.01 level; **significant at 0.05 level; *significant at 0.10 level
 Table VI.

Regressions related to hypotheses 4a/b

n=286 #1 Share of Failure cost #2 Failure cost #3 Failure cost

Quality level -0.0289***

P+A cost 0.2641***

Prevention cost 0.3180***

Appraisal cost 0.2370***

Constant 3.3446*** 0.0088*** 0.0087***

R-Squared 0.0466 0.144 0.1152

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Prob > F-Stat 0.0002*** 0.0000*** 0.0000***

Note: ***Significant at 0.01 level; **significant at 0.05 level; *significant at 0.10 level

Table VII(a).

ANOVA-test on total CoQ

Partial Sum of Squares Degrees of freedom Prob > F-Stat

Year/Model 0.009865 12 0.1126

Residual 0.146577 273

Total 0.156442 285

Note: n=286; R-squared=0.0631; Root MSE=0.0232

Table VII(b).

ANOVA-test on overall quality level

Partial Sum of Squares Degrees of freedom Prob > F-Stat

Year/Model 45.483068 12 0.2032

Residual 780.372489 273

Total 825.855557 285

Note: n=286; R-squared=0.0551; Root MSE=1.6907

 Table VII(c).

MANOVA test for group-dependence of joint distribution of overall quality level total quality cost

Statistic Degrees of freedom Prob > F-Stat

Year: Wilks’ lambda 0.9883 (exact) 2; 283 0.1891

Year: Pillai’s trace 0.0117 (exact) 2; 283 0.1891

Year: Lawley-Hotelling trace 0.0118 (exact) 2; 283 0.1891

Year: Roy’s largest root 0.0118 (exact) 2; 283 0.1891

Residual 284

Total 285
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Note: n=286
 Table VIII.

Regressions related to hypothesis 2b

n=286 #1 Prevention #2 Prevention #3 Prevention #4 Log Prevention

plus Appraisal plus Appraisal plus Appraisal plus Appraisal cost
cost cost cost

Quality level -0.0001 0.0277 4.1738**

Quality level squared -0.0001 -0.0434**

Quality level cubed 0.0001**

Log Quality level 2.2160

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Constant 0.0304 -1.3129 -133.448** -14.9536

R-Squared 0.0003 0.0027 0.0174 0.0011

Prob > F-Stat 0.7713 0.6801 0.1753 0.5807

n=286 #1 #2 Prevention cost #3 Prevention #4 Log Prevention

Prevention cost cost
cost

Quality level -0.0002 0.0120 1.6577*

Quality level squared -0.0001 -0.0172*

Quality level cubed 0.0001*

Log Quality -2.0014

Constant 0.0345 -0.5610 -53.0079* 3.1953

R-Squared 0.0055 0.0081 0.0208 0.0007

Prob > F-Stat 0.2113 0.3159 0.1148 0.6646

n=286 #1 Appraisal #2 Appraisal #3 Appraisal cost #4 Log Appraisal cost

cost cost

Quality level 0.0001 0.0156 2.5161*

Quality level squared -0.0001 -0.0262*

Quality level cubed 0.0001*

Log Quality level 6.1751

Constant -0.0041 -0.7518 -80.4401* -33.6992

R-Squared 0.0004 0.0019 0.0122 0.0067

Note: ***Significant at 0.01 level; **significant at 0.05 level; *significant at 0.10 level