Economic Order Quantity, Process Quality Level, Warranty Period, and Production Run Length Settings

Abstract

In the present paper, a modified optimal profit model with settings of production and process parameters is proposed, where the larger-the-better product characteristic with the one-sided lower specification limit is considered. The product characteristic is assumed to be normally distributed with unknown mean and known standard deviation. The selling price of product is assumed to be linearly proportional to its warranty period. We also assume that the retailer’s order quantity is negatively correlated with the wholesale selling price and is positively correlated with the warranty period. The single sampling rectifying inspection plan is adopted for determining the quality of product lot. The Taguchi’s quadratic quality loss function is addressed for measuring the used cost of customer for product. The optimal manufacturer’s process quality level, production run length, warranty period, and retailer’s order quantity can then be simultaneously determined by maximizing the expected total profit of society including both the manufacturer and the retailer. Numerical results show that the longer warranty period and the higher product quality level will lead to the larger expected total profit of society.