Using net present value methods to evaluate quality improvement projects

Abstract

Purpose

This paper aims to propose the use of net present value methods to derive the quality costs of quality improvement projects. The proposed methodology is then demonstrated in a case study of a quality improvement to an inspection process in an automobile assembly plant.

Design/methodology/approach

The approach takes the form of application of accounting net present value methods to the cost of quality methods.

Findings

Quality improvements in the manufacture of durable goods do not usually have instantaneous results in warranty cost reductions, customer satisfaction or revenue expansion. The net present value method proposed gives a more accurate accounting of the expected results of quality improvement projects by considering the temporal effects of the change and the time value of money.

Research limitations/implications

The case study presented contains fictitious data to protect the confidentiality of the source. While it is useful in demonstrating the application of the net present value method, it should not be used as an indication of actual costs of plant operations.

Originality/value

The paper provides a unique approach to cost of quality analysis that is particularly useful in the assessment of quality improvement projects for durable goods. While much research is focused on cost of quality methods and philosophies, only a little provides the level of detail in the actual application of the methods found in the case study.

Citation

Caryer Cook, V.G. and Ali, A. (2010), "Using net present value methods to evaluate quality improvement projects", International Journal of Quality & Reliability Management, Vol. 27 No. 3, pp. 333-350. https://doi.org/10.1108/02656711011023311