An Integrated Inventory Model with Order-Size-Dependent Trade Credit and Quality Improvement

Abstract

Chang et al. [1] proposed an integrated inventory model with an order-size-dependent trade credit. However, quality issues were not discussed in their model. It is unrealistic for a production system to produce 100 percent good products. The number of defective items in a lot will influence the buyer's on-hand inventory level, service level, and frequency of orders. Therefore, this paper extends Chang et al.’s [1] model with defective items. Moreover, we consider the capital investment in quality improvement. The objective of our analysis is to determine the optimal ordering, shipping, and quality improvement policies to maximize joint total profit per unit time. An iterative algorithm is established to obtain the optimal solution. Furthermore, a sensitivity analysis is conducted to study the effects of changing main parameter values on the optimal solution.