Abstract
This paper develops an inventory model for the situation where the incoming lot contains a fraction of defectives. The ordered lot is subject to screening process which itself is faulty and hence commits errors, namely, type I error and type II error. Due to type II error, imperfect quality goods are shipped to the customers and are returned back. The defectives (those screened out in the inspection process along with the returned goods) are sent for rework and the demand is met from the inventory of good items till the time they are received back. A closed form solution is obtained for the optimal order quantity and corresponding optimal expected profit is also obtained. A comprehensive sensitivity analysis is performed to observe the effect of changes in various parameters on optimal quantity and profit.
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