Economic Analysis of Quality Innovation in Design and Manufacturing
Abstract Due to several possible production modes, an industrial output may have different quality levels. Production processes and quality assurance plans are chosen and adjusted, generally as a lagged reaction to customers’ input and competitors’ strategy. Different techniques based on cost benefit analysis have existed to assess beforehand the overall benefits to society of such decisions; however, these techniques do not necessarily provide any insight as to the resulting influence on corporate profits. This paper reviews different perspectives on industrial quality and adopts a formalism in which social and corporate optimum can be compared from an engineering standpoint. The potential benefits for a manufacturer to improve the quality of its products are studied under several market conditions. The incentive is the strongest in a competitive environment where the benefits of quality innovation are twofold: quality innovation increases consumers’ demand and allows the manufacturer to keep more substantial profit margins.