Two EPQ models with imperfect production processes, inspection errors, planned backorders, and sales returns

In practice the items received in a lot may contain defective items, and during the screening process to eliminate the defective items, the inspector may incorrectly classify a non‐defective item as defective (a Type I error) or incorrectly classify a defective item as non‐defective (a Type II error). In this paper, we develop two economic production quantity models with imperfect production processes, inspection errors, planned backorders, and sales returns. A closed form solution is obtained for the optimal production lot size and the maximum shortage level for both models. We provide two numerical examples, one in which the defective probability and Type I and Type II inspection errors follow uniform distributions, and the second in which we assume they follow beta distributions. Sensitivity analyses are performed to see the impact of the defective probability, the probability of the Type I inspection error, the probability of the Type II inspection error, the holding cost, and the backordering cost on the optimal solutions. We obtain similar results on the sensitivity analyses for both numerical examples. The results show that the time factor of when to sell the defective items has a significant impact on the optimal production lot size and the backorder quantity. The results also show that if customers are willing to wait for the next production when a shortage occurs, it is profitable for the company to have planned backorders although it incurs a penalty cost for the delay.