Loss of society derived from utility and cost function

Abstract

Taguchi proposed a loss function approach for tolerance setting that trades off two conflicting factors, i.e., cost to improve quality and loss. This approach has been used in recent quality control activities. Since quality affects the customer preference for a product, the latter should be considered in the determination of quality level through tolerance setting. In this note, loss as a function of square deviation from target is considered as a decreasing utility function. Using the cost function obtained from scrapping non-conforming product, we set the optimum tolerance that represents the gains and losses of the producer as well as the customer as a measure of quality. The result shows that the ordinary Taguchi's tolerance setting procedure can be misleading. Furthermore, it also ignores the effect of the quality level of the product to the maximum utility which is an important component in the demand function, where in application it is significant.