Acceptance sampling, imperfect production, and the optimality of zero defects

Acceptance sampling is often used to monitor the quality of raw materials and components when product testing is destructive, time-consuming, or expensive. In this paper we consider the effect of a buyer-imposed acceptance sampling policy on the optimal batch size and optimal quality level delivered by an expected cost minimizing supplier. We define quality as the supplier's process capability, i.e. the probability that a unit conforms to all product specifications, and we assume that unit cost is an increasing function of the quality level. We also assume that the supplier faces a known and constant ‘pass-through’ cost, i.e. a fixed cost per defective unit passed on to the buyer. We show that the acceptance sampling plan has a significant impact on the supplier's optimal quality level, and we derive the conditions under which zero defects (100% conformance) is the policy that minimizes the supplier's expected annual cost.