Process reliability improvement and setup cost reduction in an imperfect production system

In studying an economic order quantity (EOQ)-like inventory model for a manufacturing process, a number of findings were made. The system can ‘go out of control’ resulting in a relatively minor problem state or ‘break-down’. When the production system is in the minor problem state it produces a number of defective items. It is assumed that each defective piece requires rework cost and related operations. Once the machine breakdown takes place, the production system produces severely defective items that are completely unusable. Each completely unusable item is immediately discarded and incurs handling cost, scrapped raw material cost and related operations. Two investment options in improving the production process are introduced: (1) reducing the probability of machine breakdowns, and (2) simultaneously reducing the probability of machine breakdowns and setup costs. By assuming specific forms of investment cost function, the optimal investment policies are obtained explicitly. Finally, to better understand the model in this paper, the sensitivity of these solutions to changes in parameter values and numerical examples are provided.