Abstract
In this paper, we construct and analyze inventory and investment in quality im provement 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 £is 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 op timal 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.
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