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Research on the trade-off relationship

within quality costs: A case study
a a a
Qiang Su , Jing-Hua Shi & Sheng-Jie Lai
a
Department of Industrial Engineering and Management ,
Shanghai Jiaotong University , 800 Dongchuan Road, Minhang,
200240, Shanghai, China
Published online: 10 Dec 2009.

To cite this article: Qiang Su , Jing-Hua Shi & Sheng-Jie Lai (2009) Research on the trade-off
relationship within quality costs: A case study, Total Quality Management & Business Excellence,
20:12, 1395-1405, DOI: 10.1080/14783360903248922

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 Total Quality Management
Vol. 20, No. 12, December 2009, 1395–1405

Research on the trade-off relationship within quality costs:

A case study
Qiang Su
, Jing-Hua Shi and Sheng-Jie Lai

Department of Industrial Engineering and Management, Shanghai Jiaotong University,

800 Dongchuan Road, Minhang, Shanghai, 200240, China
Downloaded by [University of California Santa Cruz] at 19:31 11 November 2014

In today’s global competition, the significant cost saving potential on the quality costs
is attracting more and more firms. The quality costs can be classified into control costs
(prevention and appraisal costs) and failure costs (internal and external failure costs).
As a universally accepted principle, the increase of the control costs will result in the
decrease of the failure costs and vice versa. This relationship is called the trade-off
relationship within quality costs. Thereof, the proportions of quality costs are vital
for balancing the quality cost and there is a balanced point (a set of proportions) that
can make a firm obtain the lowest level of the sum of quality costs. Based on a real
case study, this paper concentrates on the statistic analysis of the trade-off
relationship between quality costs and the quantitative calculation of the balanced
point. The statistic analysis reveals that the trade-off relationships within quality
costs will not show up except when time delays are taken into account. With these
time delays, the related total quality cost (RTQC) can be derived and utilised to
compute the balanced point of the quality costs. The case study demonstrates that
the findings and approach can provide a useful assistance in the quality cost saving
and management improvement.
Keywords: quality cost; balanced point; trade-off relationship; cost saving

1. Introduction
Nowadays, more and more practitioners and scholars are acknowledging the imperative-
ness of the quality costing management and improvement. This tendency is coming from
an unprecedented cost down pressure in order to cope with the fierce global competition.
According to Moyers and Gilmore (1979) and Wheelright and Hayes (1985), quality-
related costs represent a considerable proportion up to 40% of a company’s sales. Bell
et al. (1994) estimate that quality cost in the manufacturing industry is between 5 and
25% of sales. Service industries, however, expend an estimated 30– 40% of operating
costs in their quality cost. These figures tell us that the quality costs represent an
amount of money too tremendous to be ignored.
Companies have been interested in cost saving for a long period of time. However, in
recent years, the cost down strategies and activities are almost all focused on saving costs
on materials handling, manufacturing processes and facilities improving, and the organis-
ation downsizing or labour cutting and so on. These measures result in magnificent savings
and their aftermath brings in profits to companies. Nevertheless, few organisations have
explored systematically the quality cost saving. Along with the coming of the twenty-
first century, the century of quality, more and more organisations are realising the huge

Corresponding author. Email: [email protected]

ISSN 1478-3363 print/ISSN 1478-3371 online

# 2009 Taylor & Francis
DOI: 10.1080/14783360903248922
http://www.informaworld.com
 1396 Q. Su et al.

potential in the quality cost saving, the most promising source of profit in the contempor-
ary competition environment.
Juran (1974) defined the cost of quality as ‘the sum of all costs that would disappear if
there were no quality problems’ pp. 5.1– 5.25. This implies that the cost of quality rep-
resents the difference between the actual cost of a product or service and what the cost
would have been if everyone performed 100% satisfying the requirement (Hagan,
1968). According to this viewpoint, the quality costs could be regarded as the loss of
profit. Taking a Chinese auto part vendor as an example, while the profit of the
company was approximately 5 million RMB last year, its quality related cost is around
10 million RMB in the same period of time. If the amount of the quality costs can be
reduced by 50%, the profit could be increased by 100%. That is why the cost of quality
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is called ‘gold in the mine’.

In 1943, Feigenbaum stated that the quality costs can be classified into four categories:
prevention cost; appraisal cost; internal failure cost; and external failure cost (de Ruyter
et al., 2002; Harrington, 1999). This classification is widely adopted in many western com-
panies as well as Chinese companies. According to BS 6143 Part 2 (British Standards
Institute, 1990), these categories are defined as:
. Prevention cost: The cost of any action taken to investigate, prevent and reduce the
risk of non-conformity or defect. Typical examples of prevention costs are quality
training, quality assurance and quality planning. As an example, DFMEA (Design
Failure Modes and Effects Analysis) is a kind of prevention cost expended in
product design stage.
. Appraisal cost: The cost of evaluating the achievement of quality requirements
including, for example, cost of verification and control performed at any stage of
the quality loop. Examples of appraisal costs are inspection, quality audits and
acceptance tests. Costs spent on the materials and parts sampling and testing
belongs to this category.
. Internal failure cost: The cost arising within an organisation because of non-
conformities or defects at any stage of the quality loop, such as costs of scrap,
rework, retest, re-inspection and redesign. Scrap, replacement, rework and repair
can be mentioned as typical examples of internal failure. The defects due to the
design mistakes should also be classified as internal failure cost.
. External failure cost: The cost arising after delivery to a customer/user due to non-
conformities or defects, which may include the cost of claims against warranty,
replacement and consequential losses and evaluation of penalties incurred. Warran-
ties, cost of recall and loss of sales are typical examples of external failure costs.
These four kinds of costs are not independent from each other. Industrial practices
verify that there exists a trade-off relationship between the quality costs. As stated in
Feigenbaum (1991), Gryna (1999), Harrington (1987) and Zhao (2000), an increase in
prevention and appraisal costs results in a reduction in internal and external failure
costs, and consequently, the level of quality increases and productivity improves. The
research of Omachonu et al. (2004) also demonstrates that as the control cost increases,
quality improves and failure cost decreases.
Because of this trade-off relationship, along with the enhancement of the quality level,
the sum of the quality costs will go down first and then go up. As a result, at a certain
quality level, the total quality cost will reach its lowest value which is called the
optimal point, or balanced point. Therefore, the proportions of the four quality costs are
imperative for the total quality cost control. However, in daily operations, most companies
 Total Quality Management 1397

do not know what proportions are suitable for them and which point is the balanced point.
In reality, many firms just simply concentrate on reduction of the internal failure cost since
its value is usually much larger than other types of quality cost. However, this approach
can hardly achieve the expected results because of the ignoring of the interrelationship
between the quality costs.
In this circumstance, how to find out the quantitative trade-off relationship within
quality costs and how to compute out the balanced point are becoming the most concern-
ing problems in operations management. To this end, this study is conducted based on a
case firm’s real data. The trade-off relationships are explored systematically and the
balanced point is calculated out accordingly.
The remaining of the paper is structured as follows. Section two is the literature review
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on quality cost management. Then, in section three, the trade-off relationships within
quality costs are statistically studied using the case firm data and the balanced point is
derived accordingly in section four. The discussions are given in section five and
section six concludes the paper.

2. Literature on quality cost management

There is much research on quality cost management. Rodchua (2006) found that the
primary factors that aided the success of a quality cost saving programme were manage-
ment support, effective application and system, co-operation from other departments and
understanding the concepts of the cost of quality. Oppermann et al. (2001) mentioned that
the main goals of quality management in all industries are customer satisfaction by deliv-
ery of defect-free products, the radical reduction of defect rates and also of quality costs in
the production. To this end, Oppermann et al. proposed the quality cost models that can be
used to analyse and compare the quality costs of different technological processes and
different inspection strategies of no inspection, statistical process control and 100%
inspection. Chen and Tang (1992) proposed a pictorial approach to modelling poor-
quality cost and testified this approach in a computer-based information system design.
Gilbert et al. (2002) developed an estimating and evaluating approach for quality cost
of the electronic circuits. The approach combines process capability indices and failure
modes and effects analysis (FMEA) with cost mapping to allow the quality costs associ-
ated with design and manufacture induced faults to be estimated and the effectiveness of
test strategies in reducing these costs to be determined. De Ruyter et al. (2002) stated that it
was critical to be able to determine the quality-cost benefits when evaluating new
procedures or alternative operating policies. A simulation approach was proposed to inves-
tigate the cost effects of inspection and control errors. With a case study, it was found that
inspection error had a significant effect in increasing total quality cost, with the magnitude
of this increase dependent on the level of control.
Apart from the above research, some scholars have explored the quality cost account-
ing system. Tatikonda and Tatikonda (1996) stated that the traditional costing system did
not provide the true costs of quality and their impact on profit. Beheiry (1991) suggests that
a new accounting concept call activity-based costing (ABC) perhaps can give us a more
concrete way of understanding and calculating the costs of quality. Hester (1993) proposes
that ABC is the link between the costs reported in financial operating results and the
quality costs associated with a firm’s products and processes. This link is vital to
develop a quality cost management system which reflects true quality costs, relates to a
firm’s financial results and achieves maximum reductions in quality costs. DeFeo
(2001) laid emphasis on the intangible costs and figured out that more refined estimates
 1398 Q. Su et al.

may be needed for specific projects when diagnosing the cause of a specific problem or
identifying specific savings. Fink (1993) suggested that the Taguchi quality loss function
could be utilised in the external quality cost measurement and some detailed procedures
were proposed and elaborated. Tareghian and Taheri (2007) proposed a meta-heuristic sol-
ution procedure for the discrete time, cost and quality trade-off problem in project man-
agement. Yang et al. (2006) explored the same problem using fuzzy multi-attribute
group decision utility function theory.
Although quality cost is becoming a hot academic topic and attracting more and more
attention, little of the literature is dedicated to the trade-off relationship between quality
costs. Researchers have just suggested some so-called proper proportions through inves-
tigations or surveys. For example, Juran and Gryna (1970) proposed that the optimal pro-
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portions should be 0.5– 5% for prevention cost, 10– 50% for appraisal cost and 25 –40%
for internal failure cost and 20– 40% for external failure cost. However, Feigenbaum
(1983) took the optimal proportions as 5 – 10% for prevention cost, 20– 25% for appraisal
cost, 65 –70% for internal and external failure cost. One can find that even these given
ratios are not consistent with each other. Which one is correct and suitable for a specific
company? This question is bothering most of the managers who are engaged in the quality
cost reduction.
In this situation, our research focus on the trade-off relationship exploring and the
balanced point calculating. We hope it can provide general practical guidance for a
company in finding out its own trade-off relationship and calculating out the balanced
point so as to facilitate the company’s quality cost saving and management improvement.

3. Study on the trade-off relationship

This work is partially supported by the Educational Foundation of Shanghai Automobile
Industrial Corporation (SAIC). The case data are collected from a real firm in SAIC. The
case firm manufactures auto parts for SGM and SWV. The statistical analysis is based on the
case firm’s monthly quality costs from 2004 to 2006. To keep the case firm anonymous, the orig-
inal data were modified without changing the relative relationships of the four cost categories.

3.1 Initial regression analysis

First, using SPSS 13.0, the regression analysis of the prevention cost and the internal
failure cost is carried out. As shown in the first column in Table 1, there are 11 functions
for the curve estimation. The null hypothesis is that there is no relationship between
internal failure cost and prevention cost. The confidence level is equal to 1-Sig. The
statistic results demonstrate that the null hypothesis cannot be rejected, the prevention
cost and the internal failure cost do not have significant relationships with each other.
This finding is not consistent with the trade-off principle within quality costs. The
industrial experiences and observations tell us that the increase of the prevention cost
should be able to result in the reduction of the internal failure cost. Through carefully
evaluating and discussing with engineers in the case firm, we reach a conclusion that
the statistic result only implies that the real-time relationship between the prevention
cost and internal failure cost does not exist. In other words, in the case firm, the prevention
cost cannot affect the internal failure cost immediately. For instance, the effect of the
prevention cost expended on the DFMEA (Design Failure Modes and Effects Analysis)
will not show up until the mass production commenced. From this point of view,
maybe a time delay is necessary to unveil the trade-off relationship within quality costs.
 Total Quality Management 1399

Table 1. Relationship between prevention cost and internal failure cost.

Dependent variable: internal failure cost

Model summary
Equation R square Sig.
Linear .004 .853
Logarithmic .003 .857
Inverse .003 .858
Quadratic .006 .975
Cubic .008 .964
Compound .004 .854
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Power .004 .840

S .005 .828
Growth .004 .854
Exponential .004 .854
Logistic .004 .854
The independent variable is prevention cost.

3.2 Analysis with time delay

Referring to the characteristics of the product and the production system in the case firm,
four time delay options, that is, one season, two seasons, three seasons and four seasons,
are given for detecting the trade-off relationship between the prevention cost and the
internal failure cost.
The statistic analysis results are listed in Table 2. Each column is corresponding to a
time delay, from one season to four seasons. The statistic data show that a perfect inverse
relationship appears with confidence level more than 95% when time delay equals to two
seasons (or six months). Here, the inverse relationship means that the internal failure cost
can be reduced when the prevention cost increases. And the six-month time delay means

Table 2. Relationship between prevention cost and internal failure cost with time delays.

Dependent variable: internal failure cost

Model summary
1 season time 2 seasons time 3 seasons time 4 seasons time
delay delay delay delay
Equation R square Sig. R square Sig. R square Sig. R square Sig.
Linear .001 .942 .436 .038 .140 .320 .051 .591
Logarithmic .000 .962 .452 .033 .128 .345 .051 .590
Inverse .000 .981 .466 .030 .112 .378 .052 .587
Quadratic .022 .914 .477 .103 .193 .527 .052 .875
Cubic .025 .905 .477 .103 .181 .549 .055 .867
Compound .001 .911 .442 .036 .148 .307 .177 .299
Power .001 .918 .448 .034 .135 .330 .177 .299
S .001 .925 .451 .034 .119 .362 .178 .298
Growth .001 .911 .442 .036 .148 .307 .177 .299
Exponential .001 .911 .442 .036 .148 .307 .177 .299
Logistic .001 .911 .442 .036 .148 .307 .177 .299
The independent variable is prevention cost.
 1400 Q. Su et al.
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Figure 1. Inverse curve between the prevention cost and the internal failure cost with two seasons
time delay.

the prevention cost will take effect on the internal failure cost in six months. Figure 1 illus-
trates the inverse curve of the prevention cost and the internal failure cost with time delay
of two seasons.
Similarly, we can derive the time delay and relationship between other costs. As shown
in Table 3, with confidence level more than 95%, an inverse relationship exists between
the internal failure cost and the appraisal cost with a time delay of zero season.
In the same way, the regression analysis shows that there is an inverse relationship
between the appraisal cost and external failure cost with a confidence level more than

Table 3. Relationship between the appraisal cost and the internal failure cost with different time
delays.

Dependent variable: internal failure cost

Model summary
0 season time delay 1 season time delay 2 seasons time delay
Equation R square Sig. R square Sig. R square Sig.
Linear .377 .059 .067 .500 .073 .517
Logarithmic .393 .053 .064 .511 .080 .499
Inverse .408 .047 .061 .522 .086 .481
Quadratic .440 .132 .095 .740 .242 .500
Cubic .440 .132 .095 .742 .242 .500
Compound .303 .099 .045 .584 .102 .440
Power .311 .094 .042 .599 .109 .425
S .319 .089 .038 .615 .116 .410
Growth .303 .099 .045 .584 .102 .440
Exponential .303 .099 .045 .584 .102 .440
Logistic .303 .099 .045 .584 .102 .440
The independent variable is appraisal cost.
 Total Quality Management 1401

Table 4. The trade-off relationships within quality costs.

ID Independent Variable Dependent variable Relationship Time delay
1 Prevention cost Internal failure cost Inverse 6 months
2 Prevention cost External failure cost N/A
3 Appraisal cost Internal failure cost Inverse 0 months
4 Appraisal cost External failure cost Inverse 0 months

80%. And the corresponding time delay is 0 season. However, the relationship between
prevention cost and external failure cost cannot be concluded. In summary, all the statistic
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regression analysis results are listed in Table 4.

4. Calculating the balanced point

The balanced point represents the optimal distribution or structure of the quality costs. The
balanced point is determined by the trade-off relationship within quality costs. On the
balanced point, the sum of quality costs can reach its lowest level. According to the analy-
sis results in the previous section, the time delays tell us that the prevention cost will affect
the internal failure cost in six months and the appraisal cost will affect the internal and
external failure costs of the same month. Based on this relationship, a concept entitled
the related total quality cost (RTQC) is proposed and defined as follows.

RTQCðtÞ ¼ PCðtÞ þ ACðt þ 6Þ þ IFCðt þ 6Þ þ EFCðt þ 6Þ (1)

Here, RTQC(t) means the related total quality cost in month t;

PC(t) means the prevention cost in month t;
AC(t þ 6) means the appraisal cost in month t þ 6;
IFC(t þ 6) means the internal failure cost in month t þ 6;
EFC(t þ 6) means the external failure cost in month t þ 6.
Equation (1) represents that the related total quality cost of the tth month equals to the
sum of the prevention cost in the tth month, the appraisal cost in month t þ 6, the internal
failure cost in month t þ 6 and the external failure cost in month t þ 6.
Using equation (1), the related total quality costs of the case firm can be calculated as
shown in Table 5. Here, due to the six-month time delay, the original 36 sets of monthly
records are reduced to 30 records. Meanwhile, two records with negative values are
removed. So, in total 28 records are left in Table 5.
As the data are collected from a real firm, some special values are included in the data
set. In order to avoid the influence of these outliers, the data are processed as follows.
First, we assume that the prevention cost and appraisal cost should follow the normal
distribution. Values out of the 99% range of the normal distribution are regarded as special
values and should be removed. According to the statistic analysis, 99% of the prevention
cost should be in the range of [2699, 7469] and 99% of the appraisal cost should be in the
range of [13621, 44359]. In Table 5, the star marked data in columns of PC(t þ 6) and
AC(t þ 6) are out of the 99% range and the corresponding records should be removed
from the data set.
Meanwhile, with the assistance of the managers and engineers in the case firm, the
extremes of the internal failure costs and the external failure costs are star marked and
the corresponding records are also removed from the data set.
 1402 Q. Su et al.

Table 5. The related total quality cost of the case firm.

T PC(t) AC(t þ 6) IFC(t þ 6) EFC(t þ 6) RTQC(t)
1 3413.491 31482.01 45307.07 17334.09 97536.67
2 4568.175 35020.09 33560.34 22336.36 95484.96
3 5750.914 32049.36 39480.92 6963.772 84244.96
4 5816.08 27055.23 56393.57 4207.914 93472.8
5 4459.53 33482.07 57042.78 26864.53 121848.9
6 2099.299
33007.29 383047.8
58395.9 476550.3
7 5385.482 31193.51 29527.06 6461.838 72567.89
8 4621.92 31492.06 28151.77 74239.49 138505.2
9 5300.932 29346.18 6509.67 10722.08 51878.86
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10 5071.206 29879.53 19013.63 31.45667
53995.83

11 4982.432 31754.19 24191.69 39710.98 100639.3
12 5311.798 31213.91 34887.8 15992.96 87406.47
13 5426.234 31330.72 89322.01 29440.58 155519.5
14 6132.962 27608.21 52332.96 6571.584 92645.71
15 6118.888 27863.31 9670.098 9330.582 52982.88
16 5867.445 28259.57 46042.53 27337.65 107507.2
17 6536.591 33402.79 13333.15 42640.25 95912.78
18 6592.281 31758.79 14349.31 24286.08 76986.46
19 5390.68 31260.03 26860.4 36152.88 99663.99
20 4271.972 30754.87 74941.26 23300.56 133268.7
21 4476.391 30597.69 91733.78 9369.607 136177.5
22 5339.317 30323.22 67192.26 6092.957 108947.7
23 4403.507 17644.14 79311.22 26618.16 127977
24 5608.468 31500.75 62611.97 6781.61 106502.8
25 4663.076 18116.36 137666.1 85625.08 246070.6
26 4838.664 18797.22 58636.16 18403.87 100675.9
27 4897.665 19652.72 343281.3
234307.5
602139.2
28 5001.556 18842.79 61304.34 75323.47 160472.1

As shown in Table 5, three records are removed and 25 records remain for further
analysis. Among these remaining records, a group of records with the smallest RTQC(t)
and a group of records with the largest RTQC(t) are selected and compared statistically.
Here, seven records, about 30% of the total record number of 25, are selected for each
group.
As shown in Table 6, t-test verifies that all the four types of quality cost are signifi-
cantly different in the two groups. It implies that the group with the smallest RTQC(t)
is totally different from the group with the largest RTQC(t). Therefore, the records in
the smallest group can be utilised as the benchmarking records. These records represent
the best performance of the case firm in the quality cost control. So, the averages of the

Table 6. Comparison of the smallest group and the largest group.

Prevention cost Appraisal cost Internal failure cost External failure cost
T-test 95% 90% 90% 99%
Average Smallest Largest Smallest Largest Smallest Largest Smallest Largest
cost group group group group group group group group
5703.284 4297.541 32661.46 25324.29 19758.45 167835.1 12700.15 9632.645
% 8.4 48.2 29.1 14.2
 Total Quality Management 1403

four quality costs and their proportions in the smallest group could be employed as the
benchmarking balanced point for the case firm.
Referring to the properties of the smallest group in Table 6, one can find that the
balanced point for the case firm should be 8.4% for prevention cost, 48.2% for appraisal
cost, 29.1% for internal failure cost and 14.2% for external failure cost. This proportion
should be regarded as the balanced point for the case firm.

5. Discussion
In this work, the findings of time delay and the concept of total related quality cost are
introduced in the relationship analysis between quality costs. And an approach is
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defined by which the balanced point can be derived based on firm’s historical records.
The approach can provide significant assistance on the quality costs saving and manage-
ment improvement.
For instance, Table 7 gives the comparison of the suggested percentages/costs and the
case firm’s real percentages/costs. The suggested figures are determined referring to the
balanced point derived in Table 6, whereas, the real values are derived based on the
records listed in Table 5.
Table 7 shows that, for the case firm, the percentage of the prevention cost should
increase from 4.8% to 8.4% and the percentage of the appraisal cost should increase
from 26.5% to 48.2%. Consequently, the percentage of the internal failure cost will be
decreased from 44.4% to 29.1% and the percentage of the external cost will be reduced
from 24.3% to 14.2%.
If evaluating in absolute value, Table 7 shows that if the prevention cost and the
appraisal cost are increased by 8.37% and 12.57% respectively, the internal failure cost
and the external failure cost will be decreased by 59.43% and 52.41% respectively.
Consequently, the total quality cost can be reduced by 35.42%. This leverage effect is
illustrated in Figure 2.
Figure 2 demonstrates the trade-off relationship between the control costs (prevention
cost and appraisal cost) and failure costs (internal failure cost and external failure cost).
More importantly, with a quantitative relationship, it provides useful assistance for the
management decision on the quality costs control.
Meanwhile, one can find that the suggested proportions are reasonable because they
are derived based on the firm’s historical records. And the suggested optimal values are
in the range of real practices which avoids the radical change. More essentially, this
approach is able to handle the dynamic changing environment in the real world. Whenever
necessary, the proposed approach can be utilised again to take the new situations into

Table 7. Suggested proportions compared with the real proportions.

PC AC IFC EFC Total QC
Suggested % 8.4 48.2 29.1 14.2 100
Real average % 4.8 26.5 44.4 24.3 100
Suggested costs 5703.284 32661.46 19758.45 12700.15 70823.34
Real average costs 5262.747 29013.13 48705.62 26685.37 109667
Differences in costs 440.537 3648.33 228947.2 213985.2 238843.5
Percentage change 8.37% 12.57% 259.43% 252.41% 235.42%
Notes: PC ¼ prevention cost; AC ¼ appraisal cost; IFC ¼ internal failure cost; EFC ¼ external failure cost.
 1404 Q. Su et al.

Figure 2. Leverage effect.

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consideration. This property can help the firm to respond to the changing environment and
make timely adjustments to its quality cost control strategies.
The research team also tried to use this approach to explore the trade-off relationships
in other firms. The results imply that this approach works better for firms with higher
quality cost management levels in which more complete quality cost accounting catalo-
gues are included and the data are collected carefully and precisely. As an attractive
advantage, this approach does not require data to fit the regressive curve perfectly.
However, it needs to be emphasised that high quality data are still necessary and critical
for the application effectiveness. Therefore, to some degree, this approach may be useful
to evaluate the quality cost management level of firms.

6. Conclusions
Concentrating on the trade-off relationships within quality costs, a systematical study
was conducted with a case study. In this work, the time delay is induced in the regression
analysis within quality costs. Meanwhile, the concept of related total quality cost (RTQC)
is proposed and used in the balanced point calculation.
As we known, for a specific firm, its products, processes, manufacturing systems and
employees are all unique. So, we should try to find its unique balanced point from its own
historical records instead of simply referring to some given proportions.
Meanwhile, the trade-off relationship and the balanced point should be re-calculated
from time to time according to the firm’s dynamic change. The findings and approach
elaborated above broaden our knowledge on quality costs control.

Acknowledgements
The paper is sponsored by the National Natural Science Foundation of China (70672077),
‘985’ Project at Xi’an Jiaotong University (07200701) and the Educational Foundation of
the Shanghai Automobile Industrial Corporation (SAIC). The authors would like to
express their gratitude to the Department of the Quality and Economics Operations of
SAIC for its great assistance in the case study.

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