Quality, Productivity, and Cash Flow

Currently the linkage between quality, productivity, and competitive position is stated as an hypothesis, “Improving quality leads to increased productivity which in turn results in a more robust competitive position.” This hypothesis has garnered many adherents and has a body of qualitative experiential data to support it. In this paper, equations are derived which permit the hypothesis to be studied as a theory. The key equation states productivity of a process as the ratio of value out divided by value in. The value out is decreased by poor quality called a “disvalue” term. With the “disvalue” due to poor quality recognized, other equations can be written to show that lower productivity caused by poor quality reduces economic profit. this means that the cash flow to the firm is deceased. Thus, the competitive position is damaged because less cash is on hand for strategic maneuvering. An example is given of a high-technology part which could cause an expensive subassembly to fail and jeopardize a major structure.