Impact of ISO 9000 on Time-based Performance: An Event Study

World Academy of Science, Engineering and Technology 30 2007

Impact of ISO 9000 on Time-based Performance:
An Event Study
Chris K. Y. Lo, Andy C. L. Yeung, and T. C. Edwin Cheng

required by ISO registration are time-consuming, and ISO
Abstract—ISO 9000 is the most popular and widely adopted
adoption provides no real benefits to business performance
meta-standard for quality and operational improvements. [2-4].
However, only limited empirical research has been conducted
The aim of this study is to provide empirical evidence on the
to examine the impact of ISO 9000 on operational performance
impact of ISO 9000 on operational performance. We carried
based on objective and longitudinal data. To reveal any causal
out an event study and compared ISO 9000 certified with
relationship between the adoption of ISO 9000 and operational
non-ISO 9000 certified firms by controlling industry type, firm
performance, we examined the timing and magnitude of change
size and pre-event performance. We compared changes in
in time-based performance as a result of ISO 9000 adoption.
specific aspects of operational performance of each sample
We analyzed the changes in operating cycle, inventory days,
firm with those of a portfolio of control firms that fitted our
and account receivable days prior and after the implementation
matching criteria.
of ISO 9000 in 695 publicly listed manufacturing firms. We
We used operating cycle, number of inventory days and
found that ISO 9000 certified firms shortened their operating
number of account receivable days as time-based performance
cycle time by 5.28 days one year after the implementation of
indicators. We found that ISO 9000 certified firms’ time-based
ISO 9000. In the long-run (3 years after certification), certified
efficiency improved significantly after certification compared
firms showed continuous improvement in time-based with non-ISO 9000 certified firms. In the long-run, the
efficiency, and experienced a shorter operating cycle time of 11
operating cycle time gradually decreased in ISO 9000 certified
days than that of non-certified firms. There was an average of
firms, which was 11 days shorter than that of non-ISO 9000
6.5% improvement in operating cycle time for ISO 9000 certified firms. This finding provides empirical evidence that
certified firms. Both inventory days and account receivable
ISO 9000 is associated with the time-based efficiency of a
days showed similar significant improvements after the manufacturing company.
implementation of ISO 9000, too.

II. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Keywords—ISO 9000, Operating Cycle, Time-based efficiency.
ISO 9000 was developed by the International Organization
for Standardizations (ISO) in 1987. The number of ISO 9000
I. INTRODUCTION
registered sites has increased dramatically since its
SO 9000 is a meta-standard for quality management (QM)
introduction. The number of registered sites reached 776,608 at
I and it has been adopted by hundreds of thousands companies the end of 2005, representing a growth of 17.6% from the
worldwide. Since its introduction, ISO 9000 has become the
previous year. ISO 9000 underwent a major revision in 2000,
passport of the global business [1] and a basic requirement for
and the new version emphasizes continuous improvement of
government tenders in many countries. ISO 9000 has been
quality. The number of ISO 9000 certified sites dropped during
diffused into different business networks and supply chains.
the transition period when the old standard of ISO 9000:1994
Although much research has been conducted about the was phased out, but increased dramatically after the
organizational impacts of ISO 9000, there are few conclusive
introduction of the new version (Fig. 1).

results.
Given the controversy over registration’s actual benefits, the
The Number of ISO 9000 registrated site world wide
number of new ISO 9000 registration is still increasing. The
900000
number of ISO 9000 certified companies keeps rising,
800000
sustaining an annual growth rate of about 20%. Other industry
i
t
es 700000
s
ed 600000
specific QM standards, such as QS 9000, TL 9000, ISO 13485,
i
s
t
er
ISO 9000:1994
500000
have been developed to fulfill growing demands for
eg
ISO 9000:2000
f
r 400000

o
Total
meta-standards in different industries. Through standardization
er 300000
b
m
u
and systemization as a result of ISO 9000 adoption, the
200000
N 100000
operational procedures of the adopting company should be
0
more efficiency. Many companies perceive that implementing
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
ISO 9000 can improve operational performance. Despite the
Year

perceived benefits of improvement in operational efficiency, a
number of critics argue that the extra documentation efforts
Fig. 1 The growth of ISO 9000 worldwide


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World Academy of Science, Engineering and Technology 30 2007

TABLE I
Hypothesis1: The adoption of ISO 9000 leads to lower
THE NUMBER OF ISO 9000 REGISTERED SITES WORLD WIDE
inventory days.
SOURCE: [5-7]
The perceived benefits of ISO 9000 are not just confined to

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
ISO
12734
22329
40863
improving product quality, but also enhancing customer service
9000:199
162701
271847 343643
466228 394623


9
9
1
4
[11]. If the implementation of ISO 9000 can improve product
ISO
49791
quality and customer service, the time required to fulfill
9000:200
44388
167124 660132 776608
9
0
customer orders should be faster. If there is any quality problem
12734
22329
40863
49791
Total
162701
271847 343643
510616 561747
660132 776608
9
9
1
9
in product manufacturing, payment would be postponed as

defective products are returned for reworking. Customers may

not pay for the products until the quality problem is resolved. In
ISO 9000 is the most popular meta-standard with a focus on
order words, the time between product delivery and customer
operational efficiency. Through standardization and payment should be shorter for companies with higher product
continuous improvements in processes and procedures, ISO
and service quality. This hypothesis can be examined by
9000 is assumed to improve operational efficiency throughout
measuring the account receivable days.
the organization [8]. Most academics [9, 10] believe that ISO

9000 improves quality and overall efficiency in organizations,
Hypothesis 2: The adoption of ISO 9000 leads to lower
and enables them to make uniform products and to have a
account receivable days.
competitive edge, resulting in greater customer satisfaction and
In the manufacturing industry, operating cycle time consists
market share.
of manufacturing time (the time required to turn raw materials
Most of the early studies on ISO 9000 were focused on the
into products), delivery time (the time required to deliver
perceived benefits of ISO adoption by surveying practitioners
products from the manufacturer to customers) and payment
(e.g., [2, 8, 11]. The majority of these studies suggested that the
fulfillment time (the time required for customers to pay for their
adoption of ISO 9000 improves operational and marketing
accepted products). The total time incurred in the above
performance. However, little empirical research has been done
processes is known as operating cycle or “cash-to-cash cycle”
using objective data, except Naveh and Marcus [12] and [18]. Therefore, we hypothesize that operating cycle time
Corbett, Montes-Sancho and Kirsch [13]. Nevertheless, should be shorter after the implementation of ISO 9000.
Corbett, Montes-Sancho and Kirsch’s research only used data

from 1990 to 1997 and did not focus on time-based efficiency,
H3: The adoption of ISO 9000 leads to a shorter operating
while Naveh and Marcus’s (2005) study did not examine the
cycle.
impact of ISO adoption on operational performance. This study
In short, we summarize the accounting terms introduced
aims at filling this existing gap by investigating the impact of
above as follows:
ISO 9000 on adopting firms’ operational performance based on
Operating cycle = Number of inventory days + Number of
objective data, which cover the period of 1990-2005.
account receivable days
One of the most important performance indicators in the
OC = I + AR
manufacturing industry is time-based efficiency. For a I – Number of inventory days
manufacturing firm, time-based efficiency embraces the AR – Number of account receivable days
timeliness of delivery, manufacturing lead time, etc. [14, 15].
OC – Operating cycle
To measure these indicators objectively, we use an
accounting-based indicator – operating cycle time.
Number of inventory days
ISO 9000 was developed based on the basic principles of
365
quality management. The conceptual and empirical foundations
I =

for the link between improved quality and business
IT
performance are well established according to various ground
I – Number of inventory days
theories [16, 17]. ISO 9000 requires the firm to design IT – Inventory turnover ratio
procedures to ensure that quality is constantly measured and

appropriate corrective actions are taken whenever defects
COGS
IT =

occur. Therefore, the defect rate should decrease and defects
Avg.
.
Inv
should be detected and corrected early [13], and less scrap and
COGS – Cost of good sold
rework need to be handled in the manufacturing processes [12].
Avg.Inv. – Average inventory balance
As a result, the overall time required to fulfill a customer order

in certified firms should be shorter than that in firms without
Number of receivable days
similar QM systems. Moreover, during the implementation of
ISO 9000, all manufacturing procedures would have been
365
AR =

reviewed and non-value added tasks eliminated. Therefore, we
ART
hypothesize that the time required to convert raw materials into
AR – Number of account receivable days
products (i.e., inventory days) is shorter after the ART – Account receivable turnover ratio
implementation of ISO 9000.



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World Academy of Science, Engineering and Technology 30 2007

CS
The COMPUSTAT database is considered to be a very useful
ART =

source of archival financial information for studying business
Avg.AR
and corporate strategies [19]. The coverage of the financial data
CS – Credit sales
of each firm is 1988 to 2005.
Avg. AR – Average account receivable balance
IV. EVENT STUDY METHODOLOGY
III. DATA COLLECTION
In order to reveal any causal relationship between the
We selected manufacturing companies (SIC code 2000 –
adoption of ISO 9000 and operational performance, we
3999) that are listed in the stock markets in North America, as
adopted event study in this research. We largely followed the
ISO 9000 is most commonly adopted in this industry. The stock
guideline suggested by Barber and Lyon [20] for detecting
markets in the U.S. and Canada are well-established with abnormal performance between sample and control firms. The
adequate financial information for our investigations. The event period studied in this research was the period during
companies’ financial information is available in the which ISO 9000 was implemented. To pass the ISO 9000 audit,
COMPUSTAT database from Standard and Poor’s. There are
the average preparation time is 6-18 months prior registration
3,642 active manufacturing companies in the database.
[13]. Since the preparation and auditing periods typically take

at least half a year, we used “year” as the time unit in our event
ISO 9000 Information
windows. The year of registration was used as the focal point
To identify ISO 9000 certified firms and their years of
time t. The year before registration date was t – 1. Therefore,
certification, we collected ISO 9000 registration data from two
the time before ISO 9000 implementation was taken as t - 2. We
online databases, which are www.qualitydigest.com and were also interested in the long-term impact of ISO 9000, so we
www.whosregistered.com. From these two databases, we looked into the financial data for the next three years after ISO
searched by company names to find out the date of each
9000 certification (i.e., t+1, t+2 and t+3).
certification and the plants/sites that were certified. However,

each company could have multiple plants/sites being certified.
Matching Sample and Control Firms
Following the practice of previous research [12, 13, 19], we
We adopted the event study methodology and eliminated
only focused on the first ISO 9000 certification. After confounding factors other than the event of ISO 9000
compiling the data from the online databases, we found that
certification. We carefully matched sample and control pairs
1,104 out of 3,642 (30.31%) listed manufacturing firms in
based on specific matching criteria. Sample groups are
North America were ISO 9000 certified. The distribution of the
companies that experienced the event (i.e., obtaining the first
year of certification is shown in Table II.
ISO 9000 registration), while control group companies are free

from the impact of that event. Sample and control groups
TABLE II
companies have to be in the same industry with similar firm
DISTRIBUTION OF THE YEAR OF CERTIFICATION
size, and pre-event performance, so as to minimize the
ISO
9000
confounding factors in a particular industry or due to the
Year
No. of
% of Firms
overall economy status. Moreover, we matched the sample firm
firms
with a portfolio of control firms that fit the matching criteria, so
1990 4 0.36

as to minimize performance fluctuations that might happen in a
1991 8 0.72

particular control firm.
1992 42
3.80

In our study we matched the sample firms’ and control firms’
1993 82
7.43

industry type by the SIC code. In general, matching the same
1994 112
10.14

first two digits of SIC code ensures that highly similar
1995 101
9.15

industries are selected. The purpose of having this matching
1996 120
10.87

criterion is to eliminate any industry specific effects during the
1997 102
9.24

event period. Firm size was also controlled as large
1998 85
7.70

corporations may have more resources for quality
1999 71
6.43

improvements [21]. Following Hendricks and Singhal’s [21]
2000 72
6.52

event study on TQM implementation, we used 33 - 300% of
total asset, a factor of three, as our firm size matching criterion.
2001 50
4.53

Barber and Lyon [20] suggested that matching pre-event
2002 79
7.16

performance is the most critical factor for event study. They
2003 112
10.14

found that matching industry type (two digit SIC code) and 90 -
2004 35
3.17

110% pre-event performance create the most appropriate
2005 29
2.63

matching groups between sample and control firms.
1104
100.00

Accordingly, we matched the sample and control firms with

two digit SIC code, 33 - 300% firm size (total asset), and 90 -
Financial Information
110% pre-event operating cycle time. In case some sample
Operational and financial information was obtained from
firms could not match any control firms based on two digit SIC
Standard and Poor’s COMPUSTAT North America database. code, firm size and pre-event performance, we loosened the

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World Academy of Science, Engineering and Technology 30 2007

matching criteria to increase the sample size [12, 21-23]. In
corresponding statistical tests results of operating cycle,
short, the matching steps are as follows:
inventory days and account receivable days are shown in Table

3, 4 and 5, respectively. The column “From year” depicts the
Step 1 – Two digit SIC code + 33 - 300% Total Asset + 90 -
event window periods of change in performance, while t was
110% abnormal performance
the year that the sample firms obtained the first ISO 9000

certification. The column “N” contains the sample size of that
Step 2 – One digit SIC code + 33 - 300% Total Asset + 90 -
event window period, and “AP Mean” and “AP Median” show
110% abnormal performance
the abnormal performance of the indicators. Although we

matched the sample and control firms based on the performance
Step 3 – 33 - 300% Total Asset + 90 - 110% abnormal
in t-2 year, we also reported the t-3 to t-2 year data in the first
performance
row to see if there was any systematic bias prior to the sample

firms’ decision to implement ISO 9000. The second row “t-2 to
Data Analysis
t-1” shows the abnormal performance of the sample firms
The statistical tests commonly used in event studies are the
immediately after implementing ISO 9000. Since all the
paired-sample t-test (parametric), Wilcoxon Signed Ranks performance data of the sample and control firms are
(WSR) test and Sign test. If the abnormal performance follows
non-normal, non-parametric tests provide more reliable results.
a normal distribution, the parametric sample t-test is generally

valid. We examined the data for normality by using the
TABLE IV
Kolmogorov-Smimov test and the Shapiro-Wilk test. If the
THE ABNORMAL PERFORMANCE OF OPERATING CYCLE; PORTFOLIO
MATCHING, BY INDUSTRY, TOTAL ASSET, AND OPERATING CYCLE
abnormal performance of the sample firms is not normally
From
N AP
Mean
AP
p-value
p-value
p-value
distributed, the non-parametric WSR test and Sign test should
year
Medium
(t-test) a
(WSR
(Sign
be used. We trimmed out the top and bottom one percentile
Test) a
Test) a
t-3 to
records to avoid outliners. Table III shows the descriptive
650
-0.4690
1.2042
0.4135
0.1430
0.1635
t-2
statistics of the sample and control firms. The average length of
t-2 to
0.0000**
0.0000**
695
-5.2861
-5.4915
0.0900**
t-1
*
*
the operating cycle of the sample firms was 169.4 days. The
t-1 to t
682
-0.3780
-1.4538
0.4665
0.0540**
0.1690
average length of inventory days and account receivable were
t to t+1
652
-6.0636
-0.6749
0.1010
0.4795
0.4530
105.56 days and 63.83 days, respectively. Inventory day was
t+1 to 620
-2.4586
0.7034
0.2685
0.3340
0.3010
t+2
62.3% of the total operating cycle, while account receivable
t+2 to 534
-2.6932
-1.5109
0.2395
0.1390
0.3485
day was 37.7% of total operating cycle.
t+3

t-2 to t
0.0000**
0.0000**
683
-6.9016
-7.2576
0.0270**
*
*
TABLE III
t-1 to
DESCRIPTIVE STATISTICS OF THE SAMPLE AND CONTROL FIRMS
648
-4.7567
-0.6976
0.0995**
0.2720
0.3050
t+1
N
Mean
Median
St.
dev.
Min.
Max.
t-1 to 622
-5.0027
-2.3325
0.1425
0.0915**
0.1395
Sample

t+2
t-1 to
firms
536
-6.7931
-3.5919
0.0725**
0.0110**
0.1050
t+3
Total
695 2164.36 232.75 6839.38 0.25 92485.27
t-2 to
0.0000**
0.0000**
asseta
657
-7.7608
-6.9308
0.0245**
t+1
*
*
Operating
695 169.40 150.44 98.60 34.64 1216.73
t-2 to
0.0010**
0.0000**
0.0000**
624
-9.2477
-8.2144
cycleb
t+2
*
*
*
Inventory
695 105.56 86.89 85.22 4.29 1067.54
t-2 to
0.0005**
0.0000**
0.0000**
537
-11.0784
-8.9216
t+3
*
*
*
daysb
p < 0.1; **p < 0.05; ***p < 0.01.
Account
695 63.83 57.78 30.76 3.51 466.32
aThe p-value shown are one-tailed test of null hypothesis of no abnormal
receivable
performance.
daysb

Control

firms
Table IV shows that, the abnormal performance of operating
Total
695 1676.63 228.67 4335.00 0.44 56030.00
cycle was found in the first year of ISO 9000 implementation.
Asseta
We found that most significant improvement appeared in the
Operating
695 168.13 151.18 96.29 33.43 1121.60
“t-2 to t-1” period as both WSR and Sign tests show strong and
cycleb
significant results. Certified firms had 5.28 days shorter in
Inventory
695 105.76 88.72 83.42 6.97 1006.12
daysb
operating cycle in the first year after the implementation of ISO
Account
695 62.38 59.23 26.07 9.58 366.93
9000. For the period “t-1 to t”, there was moderate
receivable
improvement in operating cycle as the magnitude was smaller
daysb
compared to “t-2 to t-1”. The total decrease in operating cycle
aTotal asset is in million US$.
b
in the first two years of ISO 9000 implementation (i.e., the “t-2
Operating cycle, inventory days and account receivable are in terms of days
to t” period) was 6.7 days.
V. R
Table IV also shows that the pattern of continuous
ESULTS AND DISCUSSION
improvement after certification. The abnormal performance in
We tested the hypotheses by examining whether ISO 9000
the period “t-2 to t+1”, “t-2 to t+2” and “t-2 to t+3” was
certified firms had abnormal performance in terms of operating
gradually improving, meaning that operating cycle was getting
cycle, inventory days and account receivable days. The shorter annually. In the period t+3 year, certified firms

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World Academy of Science, Engineering and Technology 30 2007

improved their time-based efficiency by trimming 11.07 days
t-2 to t
683
-3.5423
-1.9926
0.0020***
0.0035***
0.0035***
t-1 to
from their operating cycle. These results clearly show that the
648
-0.0297
1.0969
0.4870
0.0580*
0.0325**
t+1
implementation of ISO 9000 improves overall time-based t-1 to 622
-2.1178
0.8776
0.2070
0.2515
0.1315
efficiency and the effect is enduring in long run. Therefore,
t+2
t-1 to
hypothesis H3 was fully supported.
536
-2.2246
1.2251
0.1050
0.4705
0.1410
t+3

t-2 to 653
-2.4456
-0.7954
0.0350**
0.1700
0.1740
TABLE
t+1
V
T
t-2 to
HE ABNORMAL PERFORMANCE OF NUMBER OF INVENTORY DAYS;
624
-4.1829
-0.0530
0.0440**
0.1200
0.5000
t+2
PORTFOLIO MATCHING, BY INDUSTRY, TOTAL ASSET, AND OPERATING CYCLE
t-2 to
From
N AP
Mean
AP
p-value
p-value
p-value
537
-4.0328
-1.2372
0.0050***
0.0275**
0.1320
t+3
year
Medium
(t-test) a
(WSR
(Sign test)
p < 0.1; **p < 0.05; ***p < 0.01.
test) a
a
aThe p-value shown are one-tailed test of null hypothesis of abnormal
t-3 to 650
-1.4990
1.4163
0.3110
0.1825
0.0195**
t-2
performance.
t-2 to
0.0000**
0.0000**

695
-3.6813
-3.8040
0.1260
t-1
*
*
For the results on account receivable days, the pattern is
t-1 to t
0.0065**
682
0.5199
-1.2339
0.4530
0.0190**
*
similar to the results on overall operating cycle and inventory
t to t+1
652
-1.0545
-0.2831
0.3490
0.4600
0.2785
days, but the magnitude is relatively smaller. We found that in
t+1 to 620
-2.4689
-0.9574
0.2150
0.2240
0.0800**
the periods of “t-2 to t-1” and “t-2 to t” periods, ISO 9000
t+2
t+2 to
certified firms experienced similar but less significant
534
-2.6631
-0.3722
0.2040
0.1275
0.3975
t+3
abnormal performance like the other two indicators. However,
t-2 to t
0.0000**
0.0005**
683
-3.8199
-3.8102
0.1010
*
*
account receivable days showed a strong abnormal
t-1 to
performance in the post certification period. In the “t to t+1”
648
-4.6980
-1.2180
0.0600*
0.0735*
0.0385**
t+1
and “t+1 to t+2” periods, the abnormal change in account
t-1 to 622
-4.8065
-2.2039
0.1245
0.0230**
0.0295**
t+2
receivable days was stronger compared with that of inventory
t-1 to 536
-6.2157
-2.5411
0.0550*
0.0130**
0.0420**
days. This might imply that the impact on account receivable
t+3
days was higher after firms obtained the certification officially.
t-2 to
0.0000**
0.0000**
653
-5.5278
-4.4195
0.0465**
t+1
*
*
Since account receivable days might reflect the quality of the
t-2 to
0.0030**
0.0000**
0.0000**
624
-7.0616
-5.5638
products and the delivery performance, we believe that
t+2
*
*
*
t-2 to
0.0030**
0.0005**
0.0005**
certified firms provided customers with higher quality products
537
-8.7449
-5.2435
t+3
*
*
*
and a timely manner. Hypothesis H3 was supported, too.
p < 0.1; **p < 0.05; ***p < 0.01.
aThe p-value shown are one-tailed test of null hypothesis of no abnormal
performance.
VI. CONCLUSION

We found that publicly listed manufacturing firms in the
Table V shows the abnormal performance of inventory days.
North America implementing ISO 9000 significantly improved
Inventory days comprised of 62.3% of the total operating cycle.
the time-based efficiency of their operations. Time-based
As expected, the results show a similar pattern to the overall
efficiency started to improve right after the implementation of
abnormal change in operating cycle. In the periods “t-2 to t-1”,
the ISO 9000. We found that ISO 9000 certified firms
“t-1 to t” and “t-2 to t”, the results show that there was a
continued to perform better in terms of overall operating cycle
significant improvement in inventory days. This implies that
three years after they obtained certification. The abnormal
the time required to manufacture a product from raw materials
performance of shortened account receivable days also
was 3.8 days shorter in ISO 9000 certified firms than in suggests that ISO 9000 certified firms could offer better
non-certified companies. The long-run continuous customer service and product quality.
improvement pattern is also clear from results of inventory

days. As shown in the periods of “t-2 to t+1”, “t-2 to t+2” and
“t-2 to t+3”, the length of inventory days decreased gradually in
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supported, too.
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TABLE VI
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From
N AP
Mean
AP
p-value
p-value
p-value
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Medium
(t-test) a
(WSR
(Sign test)
firms' performance: a financial perspective. The TQM Magazine, 2001.
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a
13(3): p. 180-191.
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1.3320
0.7331
0.0770*
0.0375**
0.1540
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t-2
bottom line: a comparative study of the profitability of Basque region
t-2 to 695
-1.6770
-1.2711
0.0965*
0.0080***
0.0155**
companies. Managerial Auditing Journal, 2002. 17(1/2): p. 72-78.
t-1
[5] ISO, The ISO Survey - 2005. 2006: Geneva.
t-1 to t
682
-1.2850
0.0089
0.0785*
0.3520
0.5000
t to t+1
652
-4.7400
1.5815
0.1020
0.0025***
0.0045***
[6] ISO, Twelfth cycle: The ISO Survey of ISO 9000 and ISO 14001
t+1 to
Certificates. 2003, ISO: Geneva.
620
-1.4919
1.4065
0.2965
0.0190**
0.0460**
t+2
[7] ISO, The ISO Survey - 2004. 2005: Geneva.
t+2 to 534
-3.0241
0.6285
0.1450
0.3560
0.2065
t+3

39

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World Academy of Science, Engineering and Technology 30 2007

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