Using Opportunity Costs to Determine the Cost of Quality: A Case Study in a Continuous-Process Industry

ABSTRACT

We investigated the strategic and economic importance of the cost of quality (COQ) in a firm whose production process is continuous. An empirical model was built to express the COQ as a function of two main components: traditional prevention-appraisal-failure expenses (PAF model) and opportunity losses. Opportunity losses were broken down into three components: underutilization of installed capacity, inadequate material handling, and poor delivery service. We conducted the six-month study in a company along the U.S.-Mexican border. Results show that the COQ expressed as revenue loss is mainly explained by the opportunity component. Also, the COQ expressed as profit not earned is explained by the opportunity variable but in a smaller proportion. Each variable was analyzed and specific recommendations were provided.