Inventory and investment in quality improvement under return on investment maximization

Abstract

In this paper, we construct and analyze inventory and investment in quality improvement policies under return on investment (ROI) maximization. In our model, the level of quality is represented by the fraction of an order quantity meeting the quality requirements such as product specifications. The key contributions of this paper are the establishment of an ROI model and characterization of the unique global optimal solution. We also show how the inventory level is reduced when it is optimal to invest additional money in quality improvement. In addition, we derive the unique global optimal solutions in closed-form when the investment in quality improvement is a linear function of the quality. Various interesting managerial insights and a numerical example are provided. Scope and purpose Quality improvement and inventory reduction has been extensively studied in accordance with just-in-time (JIT) and/or total quality management (TQM). Meanwhile, for finished products, the return on investment (ROI) is widely used as an economic performance criterion. The purpose of this paper is to design and analyze inventory and investment in quality improvement policies under return on investment (ROI) maximization. Specifically, this paper shows how the level of inventory is reduced quantitatively when it is optimal to invest additional money in quality improvement. In addition, this paper shows how the optimal inventory and investment in quality improvement policies are derived and characterized analytically.