The Revenue Implications of Financial and Operational Measures of Product Quality

Posted: 4 Oct 2001

See all articles by Venky Nagar

Venky Nagar

University of Michigan, Stephen M. Ross School of Business

Madhav V. Rajan

Booth School of Business, University of Chicago

Abstract

We examine the future sales implications of product quality measures for 11 plants of a manufacturing group in a Fortune 500 firm. Our results indicate that both financial quality measures, such as external failure costs incurred due to product failures at customer sites, and non-financial quality measures, such as defect rates and on-time deliveries, are leading indicators of future sales. While changes in defects and on-time deliveries affect sales in the subsequent quarter, changes in external failure costs are negatively associated with sales two and three quarters hence. Corroborating popular claims about the importance of external failure costs, we find that a $1 increase in external failure costs is associated with a cumulative sales decrease of $26, or approximately $10.40 in lost profits.

Keywords: Non-financial performance measures; Costs of quality; Customer goodwill

JEL Classification: M40, M46

Suggested Citation

Nagar, Venky and Rajan, Madhav V., The Revenue Implications of Financial and Operational Measures of Product Quality. The Accounting Review, October 2001. Available at SSRN: https://ssrn.com/abstract=273372

Venky Nagar (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-3292 (Phone)
734-764-3146 (Fax)

Madhav V. Rajan

Booth School of Business, University of Chicago

1101 East 58th Street
Chicago, IL 60637-1561
United States

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