The Revenue Implications of Financial and Operational Measures of Product Quality

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 nonfinancial 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.