The value of setup cost reduction and process improvement for the economic production quantity model with defects

This paper investigates the effect of imperfect yield on economic production quantity decisions. The production system is assumed to produce some time-varying proportion of defective parts which can be repaired at some unit cost. For a general defect rate function, we develop results that characterize the optimal run length and expected total cost and how these objects are affected by the cost parameters. Two kinds of investments in process improvements are considered: (i) reducing setup costs and (ii) improving process quality. We develop expressions for the marginal value of both setup cost reduction and process improvement and discuss the relationship between these marginal values and problem cost parameters. We show that any investment in setup cost reduction will result in a reduction in the number of defects produced, and the total number of defects can increase or decrease with an investment in quality improvement.