Cost-of-Quality Study for NC Water Utilities Using the Hickory Municipal Classification System

The growing expectation of citizens to deliver quality services without increasing taxes requires municipalities to adjust their cost models to remain good stewards of the voters’ finances. Cost-of-Quality (CoQ) models have traditionally been studied in relation to manufacturing processes as a method to increase profitability by reducing the life-cycle costs of the product. Municipalities have historically not been included in these studies as they operate on a semi-monopolistic basis for the services and infrastructure they maintain and have a different set of constraints and obligations from private entities. An analysis of three North Carolina municipalities (Winston-Salem, Cary, and Apex) is conducted to evaluate the Cost-of-Quality components of their water system budgets. The analysis consists of two evaluations. The initial evaluation compares the budgets of the aforementioned North Carolina municipalities with a previous study that analyzed three Texas municipalities’ water system budgets (Lubbock, San Antonio, and El Paso). The purpose of this portion of the study is to evaluate whether North Carolina Cost-of-Quality components behave like Texas municipalities. The second portion of this study evaluates the three North Carolina municipalities independently of the Texas study to see whether population size is a differentiator in how Cost-of-Quality components are divided in North Carolina. The three NC municipalities are chosen based on the Hickory Municipal Classification System (MCS). The Hickory MCS is a national classification system based on the relative population of each state and was developed for this study. The Texas municipalities that were studied had variable populations, variable locations, variable water sources, and variable water uses. The Cost-of-Quality analysis focuses on prevention costs, appraisal costs, failure costs, Total CoQ costs and opportunity costs between the North Carolina and Texas municipalities. Of the twelve comparative hypotheses, three CoQ costs are found to be significantly different with a probability level of p < 0.05. The results suggest that appraisal and failure costs are consistently impactful across the utilities in both states, but opportunity costs are not materially significantly different as in previous studies on Cost of Quality for utilities.