If prevention is better than cure, why do firms do the opposite?

Abstract

Common wisdom tells that, regarding quality, prevention is better than appraisal. Although scholars and practitioners concur with that, firms in practice prioritise appraisal, leading to high non-conformance quality costs. To unravel this puzzle, we understand quality as the combined result of prevention, done by the firm's back office (e.g. production), and appraisal, done by the front office (e.g. marketing). We propose a game theoretic model for which quality expenditure is an equilibrium outcome that depends on the cost of technology, the customers' sensitivity to quality, and the distribution of (variable) incentives within the firm. We conjecture those conditions for the reported quality expenditures of several companies, and calculate their optimal quality investment policy. As advocated by experts, we find that prevention should more than double appraisal, and non-conformance costs should approach zero.

Keywords:

• quality costing
• prevention and appraisal
• intra-firm incentives

Acknowledgements

This research has been partially supported by FONDECYT project number 105/1021.