Production economics and process quality: A Taguchi perspective

Although several studies have analyzed the interaction between the economics of production and process quality, most of them view quality from a very traditional perspective – reject when outside specified limits, or else accept. Recent views on quality have shown that such a definition greatly underestimates the costs of poor quality and leads to sub-optimal decisions. The primary intent in this paper is to revisit this interaction of the economics of production with process quality from a non-traditional yet more realistic ‘Taguchi’ quality cost perspective. Specifically, we investigate the possibility of investing in a process to decrease its variance. Although such an investment reduces the proportion of defects, and when large enough, the Taguchi's loss, it also increases the cost of holding inventory. Our model determines the optimal levels of inventory, and the production lot-size that minimizes the sum of inventory and quality-related costs.