Quality Cost and Its Relationship to Revenue Sharing in Supply Chain

Abstract

Quality cost is one of the best ways to determine clearly the costs and returns of quality improvement efforts. This paper discusses the impact of the quality cost on revenue sharing as a most important incentive to configure business networks.

This paper develops the quality cost approach to measure quality costs which might enable firms to manage revenue sharing in a supply chain. The developed model includes five categories; besides the well-known four categories (namely prevention, appraisal, internal failure, and external failure costs), a new category has been developed in this study as a new vision of the relationship between quality costs and innovations in industry. This new category is herein after referred to Recycle Cost. This research also examines whether such quality costs in supply chains influence the revenue sharing between partners.

Using the author's quality cost model, the relationship between quality costs and revenue sharing among partners is examined using a case study in a company which is a part of a supply chain. This paper argues that the revenue-sharing proportion allocated to supplier increases as the recycle cost of supplier increases, and the revenue-sharing proportion allocated to manufacturer increases as the prevention and appraisal costs increase. The revenue-sharing proportion allocated to manufacturer increases as the failure costs, the recycle costs of manufacturer, and the recycle costs of suppliers decrease. However, the results present surprising findings.

The present study contributes to theory and practice by explaining how the cost of recycling can be combined in quality cost model to better understanding the revenue sharing among partners in supply chains.