An empirical analysis of quality measures and quality performance drivers: Evidence from a laser eye surgery firm

Quality is an important non-financial performance measure for both manufacturing and service firms. In this paper, I examine quality costs and the drivers of quality performance within a laser eye surgery firm. My first research question addresses the link between quality performance and quality costs. I contribute to prior literature by empirically estimating the quality loss function for the firm. I estimate the loss function by examining the relationship between three alternative measures of quality performance (all based on deviations from target outcomes) and the subsequent enhancement rate, a major source of quality costs. The three measures are: (1) a "goalpost" quality measure a dichotomous categorization of service events based on a tolerance limit, (2) a linear loss measure---the deviation of actual outcomes from target outcomes, and (3) a quadratic loss measure---the squared deviation of actual outcomes from target outcomes. I find that neither the "goalpost" approach traditionally used in engineering applications nor the quadratic loss measure add explanatory power over the linear loss measure's ability to predict nonconformance costs. In addition, I find that the loss function is asymmetric; that is, identical deviations on either side of the target outcome result in different quality costs. In the second research question, I expand the extant cost of quality research by considering a broader set of factors (both endogenous and exogenous factors) as potential drivers of quality outcomes. An understanding of these associations is important to the effective management of quality and, ultimately, of costs. Specifically, I examine the extent to which four groups of factors---(1) business unit factors, (2) service agent factors, (3) service factors and (4) customer factors---drive quality outcomes. I find that the firm's quality performance is associated with variables in all four groups of factors.