Evaluating a Company’s Quality Performance

Learning Objective 4 Use financial and nonfinancial measures to evaluate quality

• nonfinancial measures are leading indicators of future costs of quality

To evaluate the firm’s quality performance, Formrob’s managers use both financial (COQ) and nonfinancial measures. That’s because each measure offers different advantages.

Advantages of COQ Measures

• COQ measures focus managerial attention on the effects of poor quality on operating income.
• Total costs of quality help managers evaluate the costs and benefits of incurring prevention and appraisal costs to eliminate internal and external failure costs.
• COQ measures assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction.

Advantages of Nonfinancial Measures of Quality

• Nonfinancial measures of quality are often easy to quantify and understand.
• Nonfinancial measures direct attention to physical processes that help managers identify the precise problem areas that need improvement.
• Nonfinancial measures such as number of defects provide immediate short-run feedback on whether quality-improvement efforts are succeeding.
• Nonfinancial measures such as measures of customer satisfaction and employee satisfaction are useful indicators of long-run quality performance.

COQ measures and nonfinancial measures complement each other. Without financial quality measures, companies could be spending more money on improving nonfinancial quality measures than the effort is worth. Without nonfinancial quality measures, quality problems might not be identified until it is too late. Most organizations use both types of measures to gauge their quality performance and to evaluate if improvements in nonfinancial quality measures eventually translate to financial gains. McDonald’s pays “mystery shoppers” to score individual restaurants on quality, cleanliness, service, and value measures. The company uses these scores to evaluate each restaurant’s performance across these dimensions over time and against other restaurants.