A study on the economics of quality in a technology management environment

Since Juran (1951) first introduced the concept of Cost of Quality (COQ), COQ theories have become important economic measures on quality issues for several decades. Most of the researches focused on the problem and solution under a static business environment, or a snap shot to a particular situation, such as the management accounting perspective of COQ problem. However, some researches mentioned that the prevention cost of COQ is one of the expenses of investment and the payback will be shown by the improvement of product quality, these approaches have considered cost of quality issues based on time factor. Indeed, the pioneer work from Juran has indicated that there is a trade-off between prevention/appraisal costs and failure costs. Nevertheless, there was no detail work or quantified information on that concept. Furthermore, neither of the current researches focus on the quantified dynamic features of the trade-off between these two opposite groups of costs of quality, nor of them took the systems quality rather than product quality issues into account.

Quality improvement program are crucial to survival of an organization under this ever changing business world. Every company spent huge amount of resources on these activities, but few of them could really understand the economics status of these quality improvement activities before they become financial burdens. Based on a capital budgeting approach, this research project explores the relationship between these two sets of cost elements on product or system quality and tries to figure out a decision point for quality improvement activities. This decision point will tell management if it is worthwhile to keep implementing a specific quality improvement program after a period of time under capital budgeting concept.