Coordinating a two-level supply chain with production interruptions to restore process quality

The classical inventory model, known as the lot size problem (LSP), assumes items produced and stocked to be of perfect quality. In reality, production processes are not defect free. Such imperfect processes generate defects that are reworked, and in some cases scrapped. The move by practitioners towards smaller lot sizes; e.g., just-in-time (JIT), as a mean of improving process and product quality prompted researchers to modify the LSP to represent reality more faithfully. The studies conducted by these researchers confirmed the observed benefits of smaller lot sizes. The inventory models developed in these studies assume that defects increase as the lot size increases, and that adjusting the process within a production cycle is not possible.