Quality improvement and setup reduction in the joint economic lot size model

The co-maker concept has become accepted practice in many successful global business organizations. This fact has resulted in a class of inventory models known as joint economic lot size (JELS) models. Heretofore such models assumed perfect quality production on the part of the vendor. This paper relaxes this assumption and proposes a quality-adjusted JELS model. In addition, classical optimization methods are used to derive models for the cases of setup cost reduction, quality improvement, and simultaneous setup cost reduction and quality improvement for the quality-adjusted JELS. Numerical results are presented for each of these models. Comparisons are made to the basic quality-adjusted model. Results indicate that all three policies exhibit significantly reduced total cost. However, the simultaneous model results in the lowest cost overall and the smallest lot size. This suggests a synergistic impact of continuous improvement programs that focus on both setup and quality improvement of the vendor's production process. Sensitivity analysis indicates that the simultaneous model is robust and representative of practice.