Quality Management Journal

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An Empirical Investigation of the Relationship

between Quality and Productivity

Melody J. (Je) McCracken & Hale Kaynak

To cite this article: Melody J. (Je) McCracken & Hale Kaynak (1996) An Empirical Investigation of
the Relationship between Quality and Productivity, Quality Management Journal, 3:2, 36-51, DOI:
10.1080/10686967.1996.11918726

To link to this article: https://doi.org/10.1080/10686967.1996.11918726

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 AN EMPIRICAL
I NVESTIGATION OF
THE RELATIONSHIP
BETWEEN QUALITY AND
PRODUCTIVITY
MELODY J.lJE) McCRACKEN, APPl.ACHIAN STATE UNIVERSITY
HALE KAYNAK, UNIVERSITY Of NORTH TEXAS
The traditional theory of quality and productivity hypollxsius an
invent rela fiomhip between quality and productivity whereas a
morecontemporarytheoryhypo/hnius that quality andproductivity
are directly related. A production simulationgame was conduaed to
examine this relntiombip. The researcb resu/ls confirmed the con-
ftmporary theory that quality andproductivity are dimIty related.
The results indicated that as deft(/j, scrap, and T(WO rk (negative
quality) darease; productivity increases. Thus, as quality increasa,
productivity increases. This study aka found that there are strong
relatiomhips between total productivity and partialproductivity
indexes, materialsproductivity, labor productivity,andcapitalpro-
ductivity, in descending order. Cost analysis implied that materials
cost constitutes a higher percentage of total cost than labor costfor
productivecompanies.
Key words: cost analysis, measurement of quality andproductivity,
partialproductivity indexes, rework, scrap, simulationgame,
INTRODUCTION
Since 1960 numerous previously unchallenged American
industries have lost substantial market share in both the
United States and international markets. T his loss has
stimulated interest in the fac tors responsible for the decline
(Chaseand Aquilano 1992). While many factors have been
studied, two important ones are quality and productivity.
36 OMJ 96 3, 00. 2
T he effec t of poor quality on competitiveness has
been extensively described and studied. There is increased
recognition of, and emphasis on, the importance of quality
not only in manufacturing but also throughout the entire
organization. In contrast, the importance of productivity
to maintaining competitiveness has received less m en-
tion in the production/operations management literature.
The major emphasis on increasing productivity has focused
on increasing laborproductivity bydecreasing labor hours.
T his increase in labor productivity is primarily accom-
plished by increasing automation, which essentially ignores
the trade-offbetween labor and capital (Istvan 1992).
Although quality and productivity have been identi-
fied as two important factors affecting the competitiveness
of a company, a review of the literature reveals that the
relationship between the two factors has received minimal
attention. T he traditional theory of quality and produc-
tivity hypothesizes an inverse relationship between quality
and productivity. Thus, this view proposes that qualitycan
be increased only at the cost of productivity (that is, as
quality increases, productivity decreases). In contrast, a
 A:'\ D IPI RICAL I\ \H TIG.\TI O\ OFTHERELATI O\ StllP BEn \'EE\: QUAUW A:'\ I) PROI)VCTI \lTY
more contemporary theory of quality and productivity
hypothesizes that quality and productivity are directly
related and that as quality increases, productivity increases.
As early as 1989, Adam and Swamidass were empha-
sizing the strategic implications of quality and productivity
and the absence of such research in the literature. Thus,
the primary objectives of this study are (1) to test the
relationship between quality and productivity to deter-
mine which of these theories is supported by the research;
(2) to investigate the relation between total productivity
and partialproductivity measurements; and (3) to examine
the COSt structure of companies in relation to productivity
and quality improvements.
In the next section, a brief literature review is pre-
sented on quality and productivity and their relationships.
Following the methodology, the results are discussed.
The article closes with future research directions.
LITERATURE REVI EW
Quality and productivity are two measures of performance
that are generally examined independent of each other.
The literature is dominated by descriptive articles that
prescribe quality and productivity programs for different
types of organizations.
Qu ality
The theoretical literature on quality primarily focuses on
definitions of quality and methodologies for improving
quality in an organization (Crosby 1980; Deming 1975;
Juran 1981; Takeuchi and Qlelch 1983). Definitions of
quality focus on the differences between producer's quality
and consumer's quality, and the various dimensions of
quality (Garvin 1984, , 1984b, 1987).
Several conceptual definitions of quality are pro-
posed. According to Freund (1985), ASQC defines
quality as "the totality of features and characteristics of a
product or service that bears ability to satisfygiven needs"
[p. 51). Garvin (1984b), however, argues that defining
quality in one sentence can cause problems. Th us, the
definiti on of quality must change as products move
through the various stages from design to market. Ftrst,
how consumers define quality should be identified
through market research. Second, these attributes must
be translated into identifiable product characteristics.
Third, strategic partnerships with suppliers must be
established to obtain quality parts and materials. Finally,
the manufacturing process must be arranged to ensure
that products are made exactly to the specifications
(Guvi n 1984b).
In conclusion, quality can be defined in many ways
that reveal the interfi mcrional nature of quality manage-
ment in an organization. Quality improvement should
be a responsibility of every member of an organization.
This covers purchasing, engineering, manufacturing,
and marketing (Garvin, 1987; Hayes, Wheelwright,
and Clark 1988) as well as service, administrative, and
support operations.
Productivity
To determine the perceived importance of productivity,
Judson (1982) conducted a study of 236 top-level executives
representing a cross section of 195 U.S. industrial compa-
nies.Judson found that American managers believe that
• The scope of most productivity improvement is too
narrow.
• Productivity efforts are not coordi nated and are
directed at the s)1l1ptoms rather than the causes oflow
productivity.
• Productivity efforts are short term and tend to avoid
long-term solutions.
OMJ 96 J, no. 2 37
 A~ DI I'IRICAL I ~ V EST [ G AT I O:\ OFTlI£ RELATIO\,SIIlI' BEn\'H:\ QUALITY A~ D PRODUCTIVITY
Only about 33 percent of companies had explicit pro-
ductivity plans that were consistent with and support
the overallbusiness plan.
• The involvement of top management in these efforts is
not strong.
Judson suggests that America will regain its competitive-
ness in the international market when U.S. companies
develop productivity plans that are consistent with the
overall business plan.
Note, however, that the majority of the theoretical
literature on productivity primarily addresses the mea-
surement of productivity and the problems associated
with the various partial productivity measures commonly
used in research and practice (Aggarwal 1980; Bester
1993; Chew 1988; Misterek, Dooley, and Anderson
1992; Sink 1983; Sink,Tuttle, and DeVries 1984; Teague
and Eilcn 1973). These authors focus primarily on the
artificial impact of changing the mix of resource inputs
when partial productivity indexes are used instead of a
total productivity index. Although limited, several studies
(Craig and Harris 1973; Hayes, Wheelwright, and Clark
1989; Schmenner 1991) document productivity measure-
ments in practice.
Total productivity measures the ratio of the total
outputs to total inputs. The inputs consist of all resources
used in the production of goods and services and may
involve labor, capital, raw materials, and energy (Craig
and Harris 1973). The partial productivity indexes dis-
cussed most in the literature include labor productivity,
materials productivity, and capital productivity indexes.
In general terms, partial productivity measures the ratio of
the total outputs to a single input. For example, the labor
productivity index is defined as the ratio of total outputs
to total labor inputs. Likewise, a materials productivity
index is the ratio of total output s to total materials
31 OMJ 96 3, no. 2
inputs, and a capital productivity index is the ratio of
total outputs to total capital investment (for example, see
Aggarwal 1980; Bester 1993; Craig and Harris 1973).
Chew (1988) suggests that companies should go
beyond direct labor in order to measure their productivity
since laborcost constitutes a relatively small part of total
cost in many businesses today. He cites one U.S. company
that distributes approximately 40 percent of its produc-
tivity budget to increase labor efficiency even though
direct labor costs represent only 10 percent of manufac-
turing costs.
Aggarwal (1980) reviewed 27 existing case studies in
the literature to identify fac tors or groups of factors that
affect productivity. Aggarwal proposes that different
industries should use different productivity measures. He
recommends that capital-intensive industries should use
capital productivity measures, labor-dominated industries
should be measured by the productivity of direct labor
alone, and that operations dominated by materials should
be measured by materials productivityalone.
Craig and Harris (1973) developed a theoretical
framework for total productivity measurement at the firm
level. They also applied their model to an actual manu-
facruring company that produces automobile and truck
components. Craig and Harris' findi ngs show that total
productivity is less volatile than the major partial produc-
tivity indexes and that only the total productivity index
indicates changes in real productivity.
Based on their visits to hundreds of factories, Hayes,
Wheelwright, and Clark (1989) recommend using total
factor productivity to determine whether overall produc-
tivity of the process has increased or decreased. When
producing different products, theysuggest takinga weighted
average of the different productivities of different resources,
where the weights reflect the monetary value of each
resource or product.
 A~ D IPIRICAl. I:\VESTIGATIO:\ OFTHERELATlO:\SHIPBE1WH :\ QUAUn A:,\ 1) PRODUCTIVITY
Schmenner (1991) examines factory productivity gains
by utilizing survey data. His research findings indicate
that most companies utilize direct labor productivity, which
is an incomplete measure whose value can be increased by
capital-for-labor substitution. Schmenner further argues
that direct labor cost in most businesses represents less
than 20 percent of the factory output value and ignores
the increasingly important role of indirect labor.
In summary, to measure real changes in productivity,
only total productivity indexes should be utilized and
when producing different products, a weighted average
reflecting the monetary value of each resource or product
should be used.
Relatio nship Betw een Quality
and Produ cti vity
While the majority of the research reported in the litera-
rure focuses either on quality or productivity, a few authors
have addressed the theoretical relationship between quality
and productivity. Amoako-Gyampah and Meredith (1989)
found that although quality may not be getting heavy
research emphasis, it is receiving considerable attention
in books. The same argument can be made for the rela-
tionship between quality and productivity. Juran and
Gryna (1993) assert that the measure of productivity is a
starting point of quality measurement. They argue that
"the pertinent output measure is that which is usable by
customers (i.e., acceptable output)" (p. 379) in the mea-
surement of productivity. Deming (1981- 1982,1982,
1985) suggests that long-range improvement of market
position, higher productivity, and better profits are real-
ized by improving quality through improvement of the
process. According to Deming, management can increase
productivity by improving quality.
These assertions have received minimum attention
in research literature, which is dominated by descriptive
case studies of either the quality or productivity programs
implemented by various companies. At best, Edosomwan
(1988), Full" (1985), Leouard aud Sass" (1982), aud
Skinner (1 986) do mentionincidental findings that suggest
a relationship between quality and productivity.
By describing Hewlett-Packard's quality and produc-
tivity improvement initiatives, Fuller (1985) emphasizes
achieving productivity gains by reducing unnecessary
work or complexity introduced by defects in the quality of
materials, tools, equipment, and other process variables.
He suggests that complexity can be caused by internal
and/or external errors. Fuller reports that employees may
spend more than half of their day either at or away from
their workstation performing unnecessary tasks because
of low quality of materials, tools, equipment, and other
process variables.
Skinner (1986) argues that most of the productivity
programs in companies focus on the wrong issues, such as
direct labor efficiency and the efficiency of factory workers.
According to Skinner, when quality is the goal, low cost
follows; but when low cost is the goal, quality is lost.
Edosomwan (1988) states that productivity and
quality are connected, interrelated, and inseparable.
According to Edosomwan, productivity and quality man-
agement are "an integrated process involving both man-
agement and employees with the ultimate goal of manag-
ing the design, development, production, transfer, and
use of the various types of products and services in both
the work environment and marketplace" (p. 62).
Leonard and Sasser (1982) alsoemphasize the relation-
ship between productivity and quality. They suggest that
an increase in quality always results in increased produc-
tivity or vice versa.
Although there are no known specific empirical studies
designed to investigate the relationship between quality
and productivity, some empirical research focusing either
OMJ 96 3, no. 2 39
 A~ D IPIRICAL I WE ST I G ,\T I O ~ OF THE REl.ATIO:\SHIP B E1W E E~ QUAUTYAND PRODUCTIVITY
on productivity or quality provide indirect support for
this relationship. The empirical studies by Hayes and
Clark (1986), Garvin (1983), Sherry (1986), and Krafcik
(1988) indicate that quality improvements result in
increases in productivity.
Hayes and Clark (1986) studied productivity differ-
ences among factories. T hey reported results that support
the importance of improved quality, lower work-in-process
inventory, and reduced confus ion to productivity gains.
Garvin (1983) studied the quality of air conditioner
manufacturers in the United States and Japan. He mea-
sured quality as the rate of occurrence of internal and
external failures. Garvin fou nd that the total quality costs
incurred by Japanese producers were less than one-half
the failure costs incurred by the best U.S. companies. In
addition, Garvin noted that the highest quality producers
also achieved the highest output per labor-hour. This
observation suggests a positive relationship between quality
and labor productivity.
Shetty (1986) surveyed thepresidentsof 171 companies
to assess the perceived importance of nine factors believed
to increase productivity. Of the factors assessed, the com-
pany presidents ranked quality improvement sixth in order
of importance for its potential to improve productivity.
Krafcik (1988) studied auto manufacturing systems
in Japan, North America, and Europe. He fou nd that
plants operating with a "lean" production policy can
manufacture a wide range of models and can maintain
high levels of quality and productivity. Productivity tends
to increase with improved quality because of reduced
efforts, more atte nt ion to process control, and less
required inspection. Krafcik suggested that lean plants
are more capable of simultaneously achieving high levels
of productivity, quality, and mixcomplexity.
In summary, the quality and productivity literature is
essentially devoid of any research designed to specifically
40 QMJ 96 3, no. 2
test the relationship between these factors. Therefore, the
following research questions should be addressed.
1. What kind of relationship- positive or negative- is
there between quality and productivity?
2. What is the extent of the relationship between total
productivity and partial productivity measures?
3. What is the contribution of labor and materials costs
to the total cost of goods sold?
METHODOLOGY
Simulation
This study analyzed 12 competitive undergraduate student
companies participating in an in-class simulation of the
production function ofa manufacturing company. The value
of behavioral simulations in research hasbeen discussed by
Cameron and Whetten (1981) and Raser (1969). Behavioral
simulations refer to a game situation in which individuals
interact with one another. If there is only limited knowl-
edge of the processes and outcomes, behavioral simulations
are the most appropriate ones to use. Furthermore, when
processes and outcomes are inherently complex and
ambiguous, behavioral simulations should be used
(Cameron and Whetten 1981). Raser (1969) suggests that
Simulations are valuable because they allow phe-
nomena to be reproduced, and thus, (1) enable the
experimenter to derive statistical probabilities when
the outcome is uncertain, and/or (2) enable him [or
her] to vary numerous aspects of the system in ways
that yield profitable insights into how a system
operates. In other words, simulations allow con-
trolled experiments to be made that would other-
wise be impossible. (p. 18)
The literature also argues that games can provide a
more effective laboratory than the more traditionalla bo-
ratory setting because the game laboratory more richly
represents a referent world that the researcher wishes to
 Ax DIJ'IRIC.\LI\\'ESTIG.\TIOX OFTHERELATIO\SHlP BEn \"EEx QUAUn .\XD PRODlTCTI\lTY
generali ze (Griffin and Kacmar 1991; Raser 1969). In
research, simulations can be used to create theories where
none existed or to test social science theories that have
been largely postulated at the level of group process and
systems behavior (Raser 1969). In other words, simula-
tions can reveal the relationships among various states of
a system, which might change under given conditions
(lUscrl969).
The types of gamrs or simulations used in research
can be classified into threegroups: (1) simple two·penon
garnrs, (2) all-computer simulations, and (3) man-machine,
or "complex environment- games (Raser 1969). Raser
argues that man-machine,or complex environment games
are more useful than the two other types of simulations
because complex environment games can be employed to
investigate both individual and system behaviors as well
as individual-sys tem interaction.
The literature raises the question of the generaliz-
ability of simulations (Allport 1968; Gordon, Slade, and
Schmitt 1986; Orne 1962; Runkel and McGrath 1972).
ligen (1986), however, states that when "the hypothesis
of interest is one demanding simply the demonstration of
an effect rather than direct generalization of that effect to
a particularsetting" (p. 258), laboratory studies should be
used. According to Chanin and Shapiro (1985), the free
simulation technique providessituations closer to a real-life
setting than does controlled laboratory experimentation.
Theysuggest that simulation techniques blend the advan-
tage; of both field studiesand laboratoryexperimentation.
LaTour et al. (1990) address the issue of using
students in research studies. They state that under certain
conditionsvalid data can be developed with students. Valid
data can be obtained when the concepts are generally
available to the population as a whole in contrast to con-
apts that are experience based. Students participating in
this simulation were advanced production/operations
management students who were knowledgeable about the
theoryand methodologyof this field.
The purpose of this study is to demonstrate the rela-
tionship between quality and productivity as opposed to
generalizing the findings across industries. This studycan
be classified as a complex-environment game, and the con-
cepts are generally available to the population as a whole.
Thus, it is an appropriate representation of a real-life situ-
ation. The use of similar simulations for research has
been reported by Cameron and Whrnrn (1981) and Das
(1982) and has gained acceptance as a valid research and
theory-building tool in organizational behavior, manage-
ment, and the social sciences (Chanin and Shapiro 1985).
St ructure and O peration of the
Production Simulation Game
"The Production Game" utilized in this study was devel-
oped by D. Keith Denton (1990) as an in-class simulation.
The purpose of the game W4S to simulate the production
function of a manufacturing company. The simulation
encouraged students to experiment with the application
of the theory and techniques learned in a production/
operations management course to maximize their company's
profits. The student companies' products were three road
signs: a stop sign, a yield sign, and a bridge barrier.These
products varied in complexity, number of component
parts, material costs, and selling pr ice.
The production process was designed by each of the
student companies. The component pacts of the various
products had to be cut from raw materials according to
customer-provided specifications. The informational part of
the sign had to be lettered. All component parts then had
to be assembled according to customers' specifications.
The pr'<>Crss design varied from one assemblyline capable
of producing all rhree products to multiple production
lines each capable of producing only one product. Some
CMJ 96 3. no. 2 41
 A~ [:IIPIRICAL IWEST IG .-\T[O~ OFTHE RE L\T IO~S Hl P B E1W E E~ QUA LIIT .-\ ~ D PRODUCTI\UY
companies produced only two products andsome compa-
nies produced all three signs. None of the companies
produced fewer than twoproducts.
Because the simulation was conducted in class, equip-
ment was limited. The production companies were labor
intensive (company labor costs ranged from 23 percent to
42 percent of their total costs); bur significant opportunities
existed for introducing new technology to increase the
companies' output. Since the workforce remained constant,
however, there was no direct trade-off between capital
and labor.
All companies utilized the same basic equipment for
their initial run. This included the foUowing items: scissors,
glue slicks, rulers, pencils, and black felt-tip pens. The
companies were not charged for this equipment Qganrities
of the initial equipment were available for purchase as
additional equipment, if needed, or for the replacement of
existing equipment due to failure. ln addition, after the
initial run, the companiescould purchase new technology
(capital equipment) from external sources. Examples of
capital equipment included such items as razor knifes and
paper cutters to replace the scissors used in the initial
run, and stamps and high-quality ink to stamp out por-
tions of the signs. Proof of purchase price was required
for equipment purchased externally, and these prices were
adjusted consistent with the factor used for internal pur-
chases. New equipment could also be developed by the
companies, outside of the production run. They were
charged for the time and materials required to develop the
equipment. Examples of company-developed equipment
included such itemsasjigs and stencils. All capital equip-
ment purchases were expensedin the period purchased.
Materials were available from a single supplier in class.
The primary material was construction paper, which was
available in the various colors required for the three signs.
Two sizes of construction paper were available and a small
42 OM} 96 J, no, 2
discount was associated with the larger size paper. The use
of constructionpaper and its tendency to bleed introduced
significant potential defectsinto the production process.
The organizational structure of each company was
defined by the individual companies and consisted of
both management and labor positions. A minimum of one
management position (CEO) was required. No hiring or
fi ring of employees was allowed. T hus, the workforce
remained constant. The wage rates fo r management posi-
tions were approximately twice that of the labor positions.
Training of employees was permitted outside of the simula-
tion runs. Costs associatedwith the training were expensed
in the nextsimulation run.
Twelve production companies were organized by
randomly assigningstudents to companies. The number of
students varied from 9 [Q 11 percompany. Each company
completed five runs of 30 minutes' duration O\'Cr the latter
pan ofthe semester. Membersof the production companies
were allowed to meet outside of the class to revi se their
strategy for the next run, to design and develop newequip-
ment,and to provide additionaltraining for theiremployees.
Additional labor costs were charged for outside meetings
based on the time spent in them. The CEO of each com-
pany was responsible for collecting and analyzingdataand
submitting reports to the professor. The reportsconsisted of
information on the organizational structure of the company,
materials and inventory management, labor management,
outside meetings,and technologicalinnovations.
Companies were given a choice of producing an)· of
three different f)'J'CS of products. In other words, a com-
pany could choose to produce only one f)-pe of product or
any combination of the three products. Demand for the
three products was stochastic.
During the production runs, the products were
shipped to the customer in batches. The number of signs
in each batch varied with the type of product. Incoming
 AS E ~ II'I R I CAL )S\'ESTIG:\ T10 S OFTHERELATIOSSHlI'm:n\'EES QUALIIT ASD PRODlTCTI\1Tr
hatches wert submitted to quality inspectors. One hundred
percent inspection was performed, and any defect in a
batch resulted in the whole batch being rejected. If all
of the signs in a batch met the specifications, the batch
was purchased by the customer. Any batch that was
rejected was returned to the company, and a fee was
assessed for returning the rejected products to the pro-
ducer. Th e company had the option of scrapping or
reworking any defective product. The inspection process
and the penalty fee were designed to encourage students
to build quality into the product instead of inspecting
quality into the product.
Research Variables
Productivity indexesdeveloped included total productivity,
labor productivity, materials productivity, andcapital pro-
ductivity. In this study, output was measured as the sales
value of outputs since the companies could not sell any
defective product. This measurement agrees with the
recent trends on customer demand on quality (Sherry
1988; Takeuchi and Quelch 1983) and with the sugges-
tion by Britney et al. (1983) that only quality products
should be computed as output. According to Maani
(1989), productivity measurement must be market ori-
ented, and output is defined as "saleable production."
Inputs for the total productivity index were measured
as total costs. These included labor costs, materials cost,
inventory cost, new equipment (capital) cost expensed in
the period purchased, penalty fees, auditing fees, and late
fees. This approach is consistentwith Hayes, Wheelwright.
and Clark's (1989) recommendation that, when produc-
ing different products, different resources should be
weighted to reflect the monetary value of each resource or
product. Therefore, total productivity is defi ned as
=.:. :=-==.:. :
Total revenues
Total productivity index
Total costs
Although some people may argue that this measure-
ment reflects profitability, Miller and Rae (1989) found
that the traditional productivity index and the formula
shown produce the same results under the following situa-
tions: (1) if only oneitem, product, or resource is involved;
or (2) if only two consecutive periods are compared.
Since the objective of this study is to find the relationship
between quality and productivity, not to compare produc-
tivity indexes from one period to another, revenues and
total costs of each production company were summed
overfive runs. By doing so, somebias, which could result
from the short-term nature of the production runs, was
eliminated. For example, some companies could not sell
any products in a given run; therefore, their productivity
was zero for that run. If productivity indexes were calcu-
lated for each run and then were averaged, the obtained
value eliminated the totalcosts for that run. Eliminating
total costs would infla te their overall productivity. In
summary, based on the l iterature review, the researchers
deemed that this ratio is an appropriate measurement of
total productivity in relation to quality.
The other productivity indexes were measured by
applying the same concept. Because all companies began
the simulation with the same basic equipment, only the
cost of new equipment was considered for measurement
of the capitalproductivity index.
Totalrevenues
Labor productivity index =- - - - -
Toral labor cost
Total revenues
Materials productivity index = _.:..:= .:..:: :::"---
Total materials cost
Totalrevenues
Capital productivity index = ,
Total neweqUIpment cost
In this study, two negative measures of quality (that
is, measures of defects or lack of quality) were used: scrap
QMJ 96 3, rc. 2 43
 A:\ D IIIIRICAI. IWt:ST1GATIO;'; OFTI1E RELATIO:-:SIIlI' BEnVE E:\ QUALITY A:\D PRODUCTI \'1TY

and whole signs fo r rework. Scrap is defin ed as the total
square inches of materials classified as unusable at the end
of run. Whole signs for rework (defective finished goods)
are defined as the total square inches of the whole signs
designated for rework in the work-in-process inventory at
the end of a run to be reworkedin the next run. Since the
type of products differed in each production company,
the quality measurements were converted to indexes. Scrap
and whole signs for rework were measured in square
inches; therefore, they were each divided by the total square
inches of signs sold. An analysis of scrap and whole signs
for rework demonstrated no statistical evidence that these
variables are correlated (r = 0.21 and p = 0.50; for defin-
itions and practical meanings of statistical symbols, see
the appendix). Since the two measurements were depen-
dent on each other over the runs, these two quality
indexes were summed after each run and over five runs.
For example, if the company classified a defective sign as
scrap, it could not be reworked or vice versa. In summary,
the negative quality index can be defined as
Negative quality index =
variable and the productivity indexes were the dependent
variables. Also, three separate simple regression analyses
were run to investigate the relationship between totalpro-
ductivity and partial productivity measures. Totalproductivity
was defined as the dependent variable, and partial produc-
tivity measurements were defined as independent variables.
RESULTSAND DISCUSSION
Relationship Between Quali ty and
Productivity Mea surements
The results of the regression analyses are presented in
Table 1. Statistics reported are (1 ) the correlation coeffi-
cient (r), (2) the coefficient of determination (r1) , (3) the
test statistic (F value), (4) the probability (p value), and
(5) the regression coefficient (b). T he definitions and
practical meanings of these statistics are provided in the
appendix. A significant inverse correlation between the
negative measure of quality and total productivity was
found. In other words, when scrap and whole signs for
rework decrease, total productivity increases. Thus, there

Scrap index + Wholesigns for rework index is a direct relationship between quality and productivity.
T he direction of causation, however, cannot be deter-
where
mined from this analysis.
Totalscrap in inchesl
Scrap index = According to the results, 47 percent of the variation
Total signs sold in inches'
in total productivity can be explained by quality. Also,
Whole signs forrework index = there was a significant inverse relationship between the
Totalwhole signs for rework in inches' negative measure of quality and labor productivity. The
Total signs sold in inches' results showed that 34 percent of the variation in labor

ANALYSIS Table 1 Relcficnship between neqonve quality and prcdccfiviry indexes

PRooucnvnYlNDEUS FVAWE DVALUE b r r
After both quality and productivity Totol producrivity 8.75' 0.01.43 - 0.5553 0..467 - 0.6831
indexes had been developed, four sep- lebo- productivity 5.08' 0.0478 1.5201 0.337 - 0.5805
arate simple regression analyses were Moterial5 productivity 12.98' 0.00.48 - 1.4486 0.565 - 0.7515
Capitol productivity 3.2" 0,1039 - 36.55.4 0.2.424 - 0.4923
performed. In these, the negative
·The Fvalue il ligrli~cont.
quali ty index was the independent ··COIlitoi productivity illigniFiconl 01tt ~ 0 10

44 QMJ 96 3, 1"10 , 2
 A~ D IPIRIC\L I\\'ESTIG..\ TI O~ OFTHE R ELATIO~ S mp BETWEEi\ QU.\UTY .-\ ~ D I'ROl>lICTI\'ITY
productivity can be explained by quality; that is, the
amount of scrap and whole signs for rework. Th is result
is not surprising since labor productivity decreases when
laborers are required to use work time to rework defective
signs and to spend time producing defective products
that cannot be sold.
The most significant inverse relationship was found
between materials productivity and the negativemeasure of
quality. The results indicated that more than 56 percent
of the variation in materials productivity can be explained
by the amount of scrap and whole signs for rework.
Again, this result was expected since the amount of scrap
affects material productivity. According to the model, a
one unit decrease in the negative quality index results in a
lAS unit increase in materials productivity. Th e weakest
correlat ion was fou nd between negativequality and capital
productivity (p < 0.11). Also, this result was anticipated
since the product being produced was labor intensive
with minimalopportunities for automating the process.
Relationship Between Total Prod uctivity
and Part ial Prod ucti vity Measurements
T he regression results between total productivity and
partial productivity measurements are summarized in
Table 2. The most significant relationship was between
total productivity and materials productivity. According
to the regression results, almost 94.5 percent of the varia-
tion in total productivity can be explained by materials
productivity. Furthermore, a strong positive relationship
Table 2 Relcnonsbip between total produchv,tyand portiol prodoctivity indexes
PAllIAl PRODUClMTY INDEXfS FVAlUE VAWE • b r
Labor producti.... ty 87.53· 0.00::)1
MaIeriaI ~ prookti.... ty 172.91 · ooon
Capitol procldivity 6.75· 0.0266
between total productivity and labor productivity was
found. Approximately 90 percent of the variation in total
productivity can be explained by labor productivity.
Although this finding does not agree with that of Mohanty
and Rajput (I988), it reinforces the fact that labor pro-
ductivity is an important factor of total productivity in
labor-intensive industries as opposed to capital-intensive
industries. Mohantyand Rajput (1988) applied productivity
measurement methods in a company that manufactures
steel wire ropes. Th eir research results did not support
that a relationship between total productivity and labor
productivity exists. Th e difference between the results
reported here and those of Mohanty and Rajput (I988)
may be due to the fact that a steel wire production process
is more capital-i ntensive than the production process
employedin this study.
Another fi nding is the significant relationship between
total productivity and capital productivity (p < 0.05).
This result coincides with the findings of Mohanty and
Rajput (I988). In sum, the results suggest, as Mohanty
and Rajput stated, that "the total productivity of an
enterprise is a function of various partial productivities
and...there is a distinct magnitude of influence of each
component on total productivity" (p. 75).
Cost Analysis
All of the companies, except numbers 1, 3, 7, and 12,
incurred a higher materials costas a percentage of total cost
than that oflabo r cost (see Table 3). Companies 1, 3, 7,
and 12 were among the least-
productive companies. There are
r
two explanations for this cost
0.2941 0.8975 0.9474 structure. F"ust, more productive
0.4100 0.9453 0.9723 companies produced more; in
0.0069 0.4029 0.6347 turn, [hey pu rcha sed more
materials than less productive
OM) 96 3. no. 2 4S
 A:-.: DIl'IRICAL 1 ~ \' ESTI G ATI 0 7\ OFTHE R F.I,AT I O ~ S H [r BETWU::-': QUALITYANDPRODUCTIVITY

productivity measurement of their organization rather

Table 3 Cost onclysis
lABOR COST M MATERIALS COST than using any type of partial productivityindex, such as
APERCENTAGE M APfRCENTAGE
COMPANY OHOTAL COST OHOTAL COST labor productivity. The third implication of the cost analysis

36,1 1
I 31.32
2 36,.48
3 3.4,77
, 33.7.4
5 23.86
relates to purchasing operations. Since materials cost
constitutes a large portion of the total cost, purchasing the
.45.37
right materials at the right time, delivered to the right
32.25
39.98
place at the minimum available cost, is an imperative in
order to produce the right quality products.
.43.44

6 35,28 37..42 Successful Companies

7 38.63 37.02
8 32,02 .40.13
9 30.31 35.81
10 36.29 37.9.4
II 31.69 33.28
12 .42.00 31.32
companies, which led to higher materials cost than labor
costs. Second, less productive companies spent more time
reworking signs instead of producing new products than
more productive companies did. Time spent on rework-
ing the finished goods led to higher labor costs as a per-
centage of total cost than materials cost. In any case, it is
correct to assume that materials cost represents a higher
percentage of total cost than labor cost, at least for the
productive companies.
The cost analysis indicatesthree important operations
issues to which companies, especially manufacturing
firms, should pay attention. As pointed out before, manu-
facturing organizations have usually tried to cut labor
costs by investing in capital in order to increase their pro-
ductivity. Their main concern to increase productivity
should be to run their operations correctly the first time
instead of wasting labor hours on reworking quality prob-
lems. Second, in order to gain real productivitychanges,
companies should utilize the total productivity index as a
While the number of companies istoo small to conduct an
analysis of characteristics affecting success, the following
characteristics observed in the most successful companies
should provide some managerial implications for individuals
interested in increasing the performance ofl abor-intensive
companies. In general, all of the companies utilized a
very flat organizational structure having only one man-
agement position. The real difference between the best-
performing and worst-performing companies was how
the manager fu nctioned during the simulation. For the
best-performing company, the manager conducted a
production analysis identifying the major production vari-
ations and involved all company members in developing
the best solutions to the problems. In contrast, the
manager in the worst company actually functioned as a
laborer assembling components during the simulation.
He developed multiple solutions to the company's quality
problems over the simulation runs without analyzing the
underlying problems or involving the other members of
the company.
In addition, the best company had average labor
costs as a percentage of the total costs but its labor costs
included substantial training costs that were expended
early in the simulation. Strategies were developed early
and were adhered to throughout the simulation runs.
Finally, idle time was a much lower percentage of their

46 QMJ 96 3, no. 2
 A~ D IPIRIC.U I\'\'ESTIG:\TJO\' OFTHERELATIO\'SIlJJ>BF:TWF.E\, QUA LITY .\ \' D PRODUCTlnn
work time reflecting the company's ongoing analysis of
imbalances and the redesign of its production process.
In contrast, the worst companies often invested hap-
hazardly in capital equipment without understanding
their underlying problems. As a result, their capital-
intensive equipment was underutilized and did not solve
their problems.
In summary, managers in labor-intensive industries
should carefully analyze the symptoms (that is, variations)
to identify the underlying problems and rhcn involve the
workers in the potential solutions to the problems.
Balancing of production lines, redesignof the process, and
training of employees may be as beneficial as investing in
capital-intensive equipment.
CO:"CLUS IO:" A:"D FUTURE
RESEARCH DIRECTIO :"S
This research using simulated student production compa-
nies confirms the contemporary theory that quality and
productivity are directly related. The results indicate that
as defects, scrap, and rework (negative quality) decrease,
productivity increases. Thus, as quality increases, produc-
tivity increases. This study also fo und that there are strong
relationships between total productivity and partial pro-
ductivity indexes, materials productivity, labor productivity,
and capital productivity, in descending order. The cost
analysis implied that materials cost constitutes a higher
percentage: of the total cost than labor costs forproductive
companies. The characteristics observed in the most suc-
cessful companies indicated the importance of employee
involvement and in-depth analysis of production variations
in enhancing quality and productivity.
Schwen k (1982) proposes that researchers should
conduct laboratory studies and field experiments simulta-
neously, with extensive communication between the two
types of research. Accordingto Schwenk, while laboratory
researchers can assist field researchers in identifying
potentially confounding variables that exist in the field
setting (that is, nuisance parameters that may interfere with
the effects the researcher is studying and art not of interest
to the study), field researchers WI help laboratory researchers
identify potential errors in the operationalization of these
variables. By doing so, clearer definitions of variables and
specific ations of the conditions that limit the generaliz-
ability of experimental research can be achieved. This
study establishes the positive relationship between quality
and productivity, and the positive relationship between
total productivity and partial productivity measurements.
Moreover, in this study new measures of productivityhave
been developed. Further research is needed to confirm
the gc:neralizability of this research for companies in all
industries. Additional research should also investigate the
importance ofvarious partial productivity indexesin relation
to the characteristics of various industries (that is, labor
intensive versus capital intensive).
Practitioners can utilize the measurements developed
in this study to assess their productivity and quality. Since
the research results indicate a signific ant positive relation-
ship between quality and productivity, companies that
implement any type of quality improvement system but
cannot achieve productivity gains should analyze their
entireoperations ratherthan looking at a partial picture of
their operations. As repeated several timesin this study, the
research results support that labor productivity alone is
not an accurate measurement of an organization's produc-
tivity. Companies should keep records of all data related
to quality and productivity if they want to measure real
changes in their quality and productivityimprovements.
APPEN DIX
Correlation coefficient (r ), probability (p value): The
correlation coefficient measures the strength of the relation
OMJ 96 3, 00. 2 47
 A:\ DIPIRIC,\ LI\'\'ESTIGATIO:": OFTfIEREI ,ATIO:\SIIII' B[ TWEE:\ QUAUTY A:\J) PRODUCTIVITY
between twovariables. Specifically, in this study, the rela-
tion between independent quality and dependent total
productivity variables. It ranges from - 1 to +1, with - 1
indicating a perfect inverse relationship and +1 indicating
a perfect direct relationship. An r equal to 0 indicates no
relationship between the variables. The p value indicates
the probability of significance for testing that the true
correlation is significant. Although it depends on the
study and the research purpose, a p value less than 0.10 is
usually considered significant. For example, r = 0.21 and
p = 0.50, measuring the relation between scrap and
whole signs for rework; this indicates that the relation
between these two variables is not statistically signific ant.
Coefficient of determ ination (r l ) : T he coefficient of
determination is the percentage of the variance of the
dependent variable that is explained by the independent
variables. T he value of r 1 examining the relation between
the total productivity and quality in this study is 0.467,
and it indicates that 46.7 percent of the variance in total
productivity can be explained by quality.
Test statistic(F value), probability (p value):The Fvalue
and p value go hand in hand. The Fvalue is the test statis-
tic, and the p value is associated with a test of hypothesis
that the model explains a significant portion of the varia-
tion in the data. In this study, an F value of8.75 with a p
value of 0.0143 indicate that the model (the relation
between total productivity and quality) explains a signifi-
cant portion of the variation in the data.
Regression coeffici ent (b): The regression coefficient is
the rate of change in the dependent variable per unit
change in the independent variable. Considering the
relation betwee n total productivity and quality in this
study, a regression coefficient of - 0.5553 indicates that
every unit decrease in negative quality (scrap and whole
signs for rework) results in a 0.5553 unit increase in total
48 QMJ 96 3,no. 2
productivity (Cohen and Cohen 1983; Hair et al. 1995;
Schlotzhauer and Littell 1987).
ACKNOWLEDGMENTS
Th e authors would like to thank the editor and the
anonymous reviewer for their helpful comments and sug 4
gestions. We are also grateful to our students who took
part in this study.
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Melody J. McCracken is on assistont profes$Ol" of pf(xludion/opero~ons
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aMI 96 3, no. 2 51