This article was downloaded by: [University of New Hampshire]

On: 28 February 2013, At: 07:10

Publisher: Taylor & Francis
Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered
office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

International Journal of Production

Research
Publication details, including instructions for authors and
subscription information:
http://www.tandfonline.com/loi/tprs20

An integrated model for optimisation of

production and quality costs
a

Walid Abdul-Kader , Ozhand Ganjavi & Aim Solaiman

Department of Industrial & Manufacturing Systems Engineering,

University of Windsor, Ontario, Canada
b

School of Commerce, Laurentian University, Sudbury, Ontario,

Canada
c

Weber Aircraft LLC, Gainesville, Houston, Texas, USA

Version of record first published: 01 Feb 2010.

To cite this article: Walid Abdul-Kader , Ozhand Ganjavi & Aim Solaiman (2010): An integrated
model for optimisation of production and quality costs, International Journal of Production
Research, 48:24, 7357-7370
To link to this article: http://dx.doi.org/10.1080/00207540903382881

PLEASE SCROLL DOWN FOR ARTICLE

Full terms and conditions of use: http://www.tandfonline.com/page/terms-andconditions
This article may be used for research, teaching, and private study purposes. Any
substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,
systematic supply, or distribution in any form to anyone is expressly forbidden.
The publisher does not give any warranty express or implied or make any representation
that the contents will be complete or accurate or up to date. The accuracy of any
instructions, formulae, and drug doses should be independently verified with primary
sources. The publisher shall not be liable for any loss, actions, claims, proceedings,
demand, or costs or damages whatsoever or howsoever caused arising directly or
indirectly in connection with or arising out of the use of this material.

International Journal of Production Research

Vol. 48, No. 24, 15 December 2010, 73577370

An integrated model for optimisation of production and quality costs

Walid Abdul-Kadera*, Ozhand Ganjavib and Aim Solaimanc
a

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

Department of Industrial & Manufacturing Systems Engineering, University of Windsor,

Ontario, Canada; bSchool of Commerce, Laurentian University, Sudbury, Ontario, Canada;
c
Weber Aircraft LLC, Gainesville, Houston, Texas, USA
(Received 8 January 2009; final version received 30 September 2009)
Whether an industrial organisation is involved with production of new goods or
engaged in reverse logistics to recycle used products, the items produced that do
not meet specifications can cost the organisation in many different ways. The
administrative expenses of handling returned items and the cost of reworking the
items that have failed in plant quality control or returned by customers can be of
concern to the manufacturers. While these are measurable costs, there are other
costs such as loss of customers good will which are hard, if not impossible, to
estimate. The model presented in this paper is aimed at optimising the measurable
cost of reworking/scrapping the off-specification items as well as the cost of
adjusting manufacturing processes with the aim of reducing or eliminating
rejected pieces. The adjustment of process specification in relation to customer
specification is a strategy that can affect production and quality cost.
Consideration for optimal production specification is one of the elements of the
model presented in this paper. In the proposed model, the direct cost of poor
quality has been represented by a symmetrical truncated loss function. We have
considered investment to adjust the mean and variance of the process.
A numerical example is presented to demonstrate how the model can work in a
real-world setting.
Keywords: economic investment; quality; rework/scrap costs; process defects

1. Introduction
Some of the strategies utilised by manufacturing companies to compete in the market place
include attempts to lower cost and improve quality of their products. Waste reduction is
an important element of minimising total cost of production (Raiman and Case 1990).
Numerous journal articles, written in the recent past, on the subject of cost reduction focus
on costs related to quality loss. In practice, the costs incurred in a production process
include manufacturing costs, materials costs, quality loss cost, inspection costs, rework
costs, and scrap costs. A search of the literature on this topic reveals that only a few
attempts have been made to combine manufacturing and quality related costs in an
integrated model. One of the focuses of this research work is on reduction of process
variance as well as bringing the process mean closer to its target. This element of the model
attempts to reduce the amount of products that are prone to extra costs of rework/repair.
The cost function utilised in this part of our model will be Taguchis quadratic loss
function.
*Corresponding author. Email: kader@uwindsor.ca
ISSN 00207543 print/ISSN 1366588X online
2010 Taylor & Francis
DOI: 10.1080/00207540903382881
http://www.informaworld.com

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

7358

W. Abdul-Kader et al.

The variation in quality characteristics of a product causes the reduction in its quality.
Process deterioration is often the main cause of increased variation and hence
off-specification items. Off-specification items are often repaired and sent back to the
original station where defects are detected. At times a portion of off-specification items are
discarded rather than reworked (Chiu 2003). The rework/repair and discarding are not free
of costs. Taguchi et al. (1989) proposed a quadratic loss function to link the costs of poor
quality to the level of quality characteristic or quality performance. In this context quality
performance means the closeness of a products functional performance to its desired
target value (Byrne and Taguchi 1986). The Taguchi quality cost function is overwhelming
in the reviewed literature as models presented by Chan et al. (2005), Chen (2006), Tsou
(2006), and Peng et al. (2008) use this type of quality cost function. Another type of cost
function used in the literature is reflected normal.
The reflected normal loss function was proposed by Spiring (1993), and Spiring and
Yeung (1998) to capture quality loss costs. Kulkarni and Prybutok (2004) proposed a
modification to the reflected normal loss function. This function was proposed as an
alternative to Taguchis loss function. Kulkarni (2008) presented a model for optimal
investment for process variance reduction as well as optimal quality inspection and the lot
size. The quality loss function used in the model has a modified reflected normal form. It is
interesting to note that Kulkarnis paper shows that as the variance of the process
increases the reflected normal approaches the Taguchi form of quality cost function. This
is due to the fact that the convex part of the reflected normal curve falls outside of the
tolerance limits when the variance is increased. We feel like most of the other researchers
that Taguchis quality cost function is adequate for the application. Taguchis function
directly links the quality characteristic to the internal and external failure costs. The
objective of our quality improvement method is to minimise the sum of the internal and
external failure costs.
Kapur and Wang (1987) proposed a short term solution to decrease the variance of the
units shipped to the customer by imposing specification limits on the process and truncate
off-specification through inspection. Their model does not attempt to reduce the process
variation; rather it inspects and removes the off-specification items to reduce the variation
in the shipped items. Thus, they have added inspection cost and scrap cost in the loss
function model. It is a general understanding that shifting the process mean is easier,
in relative terms, compared to reducing the variance. Wen and Mergen (1999) established
an optimal process mean by balancing the cost of not meeting the specification limits.
Chen et al. (2002) modified Wen and Mergens model of optimal process mean by
providing a linear and quadratic asymmetrical quality loss function for items within and
outside of specification limits. Jeang and Yang (1992) consider tool wear as the most
important factor affecting machining accuracy. Their tool replacing model involves both
symmetrical and asymmetrical quality loss functions. Vokurka and Davis (1996) presented
a case study in manufacturing scrap reduction through quality improvement. Cain and
Janssen (1997) provided three asymmetrical loss functions for optimal process setting.
Jeang (1997) utilised a response surface approach to minimise the total costs of tolerance
and quality loss based on three cost estimation scenarios. Jeang (2001) presented a model
for simultaneous optimisation of product and process design parameters. For situations
where repairable defective items are reworked, Chiu and Chiu (2003) presented an EPQ
(economic production quantity) model which behaves like the optimal lot sizing model but
for defective and scrap rates. Chiu (2003) considered the effect of the reworking of
defective items with backlogging allowed.

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

International Journal of Production Research

7359

Boucher and Jafari (1991) utilised sampling plans to determine process targets. Pulak
and Al-Sultan (1996) presented a model to find the optimal process target under rectifying
inspection plan. They added inspection plans to further expand the ideas of Boucher and
Jafari (1991). Chen (2006) proposed a model to determine optimum process mean and
standard deviation. This is a modified version of the work by Pulak and Al-Sultan (1996)
for cases when there is rectifying inspection plan in place. The paper utilised Taguchis
(1986) quadratic quality loss function in their model.
Chiu (2007) presented an economic manufacturing quantity (EMQ) model for
scenarios when there are some random defective items produced and the defective items
are subject to rework or scrapping. The model produces optimal levels of the lot-size and
backlogs to minimise expected overall costs. Sarker et al. (2008) presented an EPQ
inventory model for a multi-stage manufacturing system with rework process. They
considered only two inventory policies. Cardenas-Barron (2009) provided correction and
further expansion of the model presented by Sarker et al. (2008).
The above papers focus on reducing defective rates by optimising process settings.
The following papers attempt to reduce defective rates by means of quality investment.
Fine and Porteus (1989) allowed small, but frequent, quality investment overtime to
reduce defective rates. Hong and Hayya (1993) presented a model relating process
quality to process quality investment. The model contains expressions for process
parameter changes in terms of quality investment. Ouyang and Chang (2000)
investigated the effect of quality improvement on modified lot size reorder point
models involving variable lead-time and partial backorders. Their model considers an
imperfect production process with the provision of an investment option to improve
the process quality. Ouyang et al. (2002) presented the options of investing in process
quality improvement and in setup cost reduction. The lead-time can be shortened for
an extra crashing cost.
A significant development in this field, in the form of a financial cost model for quality
investment, has been presented by Chen and Tsou (2003). Their notable contribution
involves expressions for the mean and variance of the process as a function of investment.
This is the focus of our research as well. Similar expressions have been presented in other
papers, but they are in most part based on the proposed cost models by Hong and Hayya
(1993), and Ganeshan et al. (2001).
Affisco et al. (2002) presented a lot size model with consideration to invest in quality
improvement and setup cost reduction by a vendor. They investigated the impact of such a
measure on system-wide cost reduction in a supply chain. The quality investment function
utilised in this paper sets the level of quality measures as an exponential function of the
level of quality investment. Liu and Cetinkaya (2007) proposed a modification to the
investment function used by Affisco et al. (2002). Their function not only includes a one
time investment but also considers additional annual improvement expenditure. They
stated that this modification in investment function drastically changes the results
obtained by Affisco et al. (2002).
Chan et al. (2005) presented a model for joint determination of quality investment level
to reduce process variance, and optimal lot size. They used Taguchis loss function. Tsou
and Chen (2005) studied a dynamic model for a defective production system with
mistake-proofing (poka-yoke). They stated that mistake-proofing activities have an effect
on the cost of a production system, and the effect depends on the cost of mistake-proofing
and the probability of the process going out of control. Tsou (2006) presented a model to
explore the effects of investing in process improvements as well as setting the lot size.

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

7360

W. Abdul-Kader et al.

The quality characteristic is assumed to be normally distributed and the loss function used
is the Taguchis truncated loss function.
Peng et al. (2008) proposed a model that considers the present value of the cost of
deteriorating quality with usage to optimise quality level of the product off the production
line. The model considers Taguchi loss function but it is extended to a multivariate loss
function. Liao et al. (2009) provided a model for expected cost by integrating maintenance
and production programmes for a production system that is deteriorating and the
maintenance is not perfectly performed.
The existing literature, as discussed above, models the interaction between the
economics of production and process quality improvement. Current research focuses, in a
large part, on economic lot-size models generated by quality improvements. The economic
lot-scheduling models can contribute to the joint decision of economic production and
quality investment, but they do not segregate the financial returns of quality investments
to a company. This shortcoming limits the practical use of these cost models and hence
presents an opportunity for further research. Moreover, manufacturing cost and rework
cost are also related to process tolerance (Chase and Greenwood 1988), which is not
included in earlier cost models.
In this paper, three significant contributions are made to the field of study. First, we
develop a total costs model to determine the optimal process tolerance limits. Second, we
introduce our investment model to determine the amount of quality investment necessary
in order to economically correct a defective process resulting in minimum cost of
production. Third, we combine the above two models into an integrated cost model that
can help the joint decision on the level of investment and with tolerance limits in order to
achieve optimal process settings. The savings will be realised by the reduction of rework/
scrap costs. The literature survey, presented earlier, indicates that this type of modelling
approach has not been tried in the field of defective process improvement and economics
of quality investment.
The remainder of this paper is organised as follows: Section 2 discusses the integrated
cost model and its two sub-models. In Section 3, the tolerance model which is the first
sub-model of the integrated cost model is discussed. Quality investment model, the second
sub-model of the integrated cost model is described in Section 4. Section 5 is dedicated to a
case study showing the modelling steps and analytical results in order to verify our
proposed model. Finally, the conclusion of this paper is provided in Section 6.

2. The integrated cost model

The production system under study is a serial production line producing discrete products.
The manufacturing process can produce some nonconforming products due to process
defects. The reworking of defective products starts immediately after the regular
production ends. There is a cost associated with further processing of defective products.
A portion of the repaired items is rejected as scrap. The mean and variance of the process
can be modified at a cost. The cost of variance reduction is, generally, much bigger than
the cost of mean adjustment. Product specification is a decision parameter, and there is a
cost associated with looser specification.
The total cost would be affected by decisions regarding process modification and
changes in specification. The purpose of the integrated cost model is to determine the best
quality specification and the best quality investment level, mostly for variance reduction,

7361

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

International Journal of Production Research

to achieve the minimum expected total cost per unit of the product. The integrated cost
model is composed of two sub-models, the tolerance model and the investment model.
The tolerance model determines the optimal tolerance limits to minimise cost. The
investment model determines the optimal quality investment necessary in order to correct
a defective process with minimum cost of production. The integrated cost model combines
the above two models into a single model that can facilitate joint decisions on tolerance
and investment levels.
To minimise total costs, we need first to identify all elements of cost including
manufacturing related costs as well as quality losses involved in a particular product. We
assume that the manufacturing process follows a normal distribution with truncated
quality characteristics (QCH) as depicted in Figure 1. In Figure 1, Y indicates the quality
characteristic and f(Y ), its probability density function. L(Y ) is the quality loss function
which will be discussed shortly. It is prudent at this point to introduce the notation used in
the paper to better understand the models details.

2.1 Notation and definitions

The notation and their definitions are not presented in alphabetical order. Instead, they
are presented in an order to keep the related items in close proximity to each other.
Y
f(Y )
fT (Y )
V(Y )


Cpm
Cpk
r
LSL

quality characteristics random variable;

probability density function of quality characteristics Y, assumed to be normal;
truncated probability density function of Y;
variance of quality characteristics Y for the truncated probability density function;
process standard deviation of Y;
process mean of Y;
process capability index;
process capability ratio;
fraction of units that have passed the inspection;
lower specification limit;

L(Y) = K (Y T )2

L(Y)
&
f(Y)

f (Y)

Y
LSL = m Z

m= T

Figure 1. Quality characteristics and Taguchis loss function.

USL = m + Z

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

7362
USL
t
Z
 

I
L(Y )
T
K
Ic
Mc
Pc
Rc
Sc
C(Y )
TC
I
I
2
M
L2
0
T



W. Abdul-Kader et al.
upper specification limit;
process tolerance of Y which is USL  LSL=2;
ratio of tolerance to  (a constant) t=;
probability density function of standard normal variable;
cumulative probability of standard normal variable;
cost of quality investment;
quality loss function; in our case it is KY  T 2 ;
target value of Y, for properly adjusted process T ;
cost coefficient of quality loss;
inspection cost/unit;
manufacturing cost/unit;
part and material cost/unit;
rework cost/unit;
scrap cost/unit;
total cost as a function of quality characteristic Y;
expected total cost per item. TC E[C(Y )];
process mean associated with quality investment I;
process standard deviation associated with quality investment I;
maximum (before investment) level of the process variance;
minimum achievable level of the process variance;
initial value of the process mean at the decision time;
target value of the process mean;
investment function parameter for process variance;
investment function parameter for process mean.

As depicted in Figure 1, based on truncated distribution we can have three scenarios:

(1) When the dimension of part is falling within the specification limits;
(2) When the dimension of part is above the specification upper limit;
(3) When the dimension of part is below the specification lower limit.
The expected total cost, TC, can be written as:
TC ECY 
ECLSL  Y  USL CY 4 USL CY 5 LSL:

There are generally four scenarios regarding the treatment of the off-specification
products:
(1)
(2)
(3)
(4)

Off-specification
Off-specification
Off-specification
Off-specification

items on both tails of the distribution are discarded;

items on both tails of the distribution are reworked;
on the high end is discarded and on the low end is reworked;
on the low end is discarded and on the high end is reworked.

Procedures to produce expected costs for these four scenarios are similar with some
differences in total expected cost for each scenario. We shall develop the cost for scenario
number (4), which is the appropriate case for our example presented in Section 5. Hence
the expression for C(Y ) would be:
8
< Pc Mc KY  T 2 Ic , for   Z  Y   Z
CY Pc Mc Rc Ic ,
:
2
for  Z 5 Y
:
2Pc 2Mc Sc Ic ,
for Y 5   Z
The last two lines in Equation (2) indicate that when Y is too large there will be a cost
of rework and when Y is too small, the part must be scrapped and a new part must be built
to replace it. There is always the argument that a portion of rework or replacement of the

International Journal of Production Research

7363

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

off-specification items may also be off as well. This amount is so small that for practical
reasons we consider it to be zero, e.g., if 5% of items are above USL and will receive
rework, and if 5% of the rework turns out to be above USL this amounts to 0.25% of the
original batch. For simplicity of modelling and because these quantities are small, we
consider them to be zero. We assume all the reworks and all the replacement for discarded
items meet the target value and would not result in any additional extra cost of quality.
The expression KY  T 2 in the first line of the cost function is Taguchis quality loss
function.

2.2 Methodology for integrating costs

As indicated earlier, there are two sub-models for our integrated cost model, the tolerance
model and the investment model. These sub-models are utilised in a sequence of two
phases. Phase-I starts with a known defective process. We identify the process parameters
and measure their respective values. Then, we plug those parameters into the tolerance
model to determine the optimum tolerance limits. The output of the tolerance model
becomes an input for the investment model.
In Phase-II, the new levels of mean and variance are unknown and are a function of the
investment level. We set the specification limits, as determined by the tolerance model, and
plug them into the quality investment model. The solution of the investment model
produces the optimal process mean and standard deviation to minimise the production
cost. The investment cost is spent to improve the performance of the process by decreasing
the variance and bringing the mean closer to its target. This action will result in a decrease
of rework/scrap costs.

3. Tolerance model
The rest of this section presents the tolerance model as follows:
TC Ic Mc Pc Mc Pc Rc Sc g1 K 2 g2 ,
where
g1 1  Z and



2Z Z
g2 1 
:
2Z  1

It is worth noting that the variance of the process  2 is a given parameter of the model.
The above model is used to determine the optimal level of Z to produce the minimum total
expected cost. The value of Z determines the LSL and the USL. Let us now demonstrate
how this model is derived.
As we stated in the paragraph after Equation (2), the Taguchi quality loss function for
Y values between the specification limits is L(Y ) KY  T 2 . The best case scenario is
when the process mean is cantered at its target, that is  T. In such a case we have:
ELY EKY  T 2
KEY  T2
KEY  2
KVY :

7364

W. Abdul-Kader et al.

where V(Y ) is the variance of the truncated probability density function of Y, which is
different from  2 , the variance of Y before truncation. Equation (3) reveals that lower
values of variance V(Y ) are associated with lower expected quality loss. The variance V(Y )
can be lowered by lowering  2 as well as by tightening the specification limits.
To find an expression for V(Y ) we need to know the:
. Variance of the process distribution;
. Relationship between process tolerances and the truncated variance.

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

Let us begin with the relationship between process tolerances and process variability.
One way to address this relationship is to use the process capability index, which is a better
indicator of centring:
Cpm

USL  LSL
,
6

where  is the square root of the expected squared deviation from target T. T equals
USL LSL=2, and USL and LSL are the upper and lower specification limits
respectively.
For the general case when T and  are different, we have:
 2 EY  T 2 
EY  2    T 2
 2   T 2 :
For the case of  T, we have  2  2 . In Equation (4), we replace the term
(USL  LSL) with 2t and  with , so that:
Cpm

t
:
3

If Z represents the ratio of t over  (i.e., Z t=), Z 3Cpm . Here Z would be the
indicator for process capability.
So far, we have the relationship between tolerance, t, and process standard deviation,
. Next, we discuss the variance of truncated distribution.
After a total inspection, the out-of-specification products are removed. The probability
density function of those items that have passed the screening (acceptable items) is given
by dividing the probability density function of Y by, r, the proportion of acceptable items
(Taguchi et al. 1989). Let fT Y be the probability density function for the truncated
random variable Y. Then we have:
 Y2 
1 1
p e  22 :
fT Y
r  2
where r 2Z  1 is the area under the normal curve bounded by (  Z) and
( Z) for positive values of Z; and Z is the cumulative distribution function for the
standard normal variable. Therefore, the variance of the passed items, V(Y ), would be:
Z Z
Y  T 2 fT Y dY
VY
Z

Z
Z

Y  T 2

Z

1 1
p e
r  2

Y
2
2

dY:

International Journal of Production Research

For the case of T , we obtain:

Z Z
 Y2 
1 1
Y  2 p e  22 dY:
VY
r  2
Z

7365

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

Performing integration by parts, V(Y ) is obtained as shown in Equation (7) (Kapur and
Wang 1987):


2ZZ
:
7
VY  2 1 
2Z  1
Equation (7) is the expression of the variance of the truncated distribution in terms of the
process variance  2 and process capability represented by Z, which in turn is a function of
the tolerance.
Expanding the expression for expected cost developed in Equation (2), we obtain:
Z z
Pc Mc KY  T 2 Ic  f Y dY
ECY
z
Z1
Pc Mc Ic Rc
f Y dY
z
Z z
2Pc 2Mc Sc Ic
f Y dY:
1

By completing the process of integration in the above expression, we obtain the following
model:


2zz
2
8
ECY Mc Pc Rc Sc 1  Z Ic Mc Pc K 1 
2z  1
This can be simplified into the following model:
TC ECY
Ic Mc Pc Mc Pc Rc Sc g1 K 2 g2 ,

where,
g1 1  z

and



2zz
g2 1 
:
2z  1

Equation (9) is our tolerance model. The only unknown in this model is Z. Through
minimisation of TC, we can obtain an optimum value of Z. Since t Z, the optimal
tolerance limit will be computed easily. In the following sections, we present the steps
involved in the formation of the quality investment model.

4. Quality investment model

Quality deterioration due to equipment wear is a common phenomenon in any production
process. Corrective actions and maintenance can ameliorate the situation or even
completely eliminate such adverse effects. The distinct feature of our research is the study
of economic justification of quality investment in deteriorated processes.

7366

W. Abdul-Kader et al.

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

As it was stated earlier, the output of our tolerance model will become an input for the
investment model. The optimal tolerance limit obtained from the tolerance model will be
utilised in the investment model to establish the best mean and variance for the process,
and hence the level of investment that can produce such an outcome. The uniqueness of
this approach, compared to the other published work, is the fact that the model takes the
mean and variance of the process as decision variables. As the wear on equipment causes
shifts in the mean and increases in the variance, considering them as decision variables,
and subjecting them to modification, while maintaining a certain tolerance, seems to be
logical. In the course of developing our model, the new levels of mean and variance will be
substituted with the level of capital needed to obtain them.

4.1 Working assumptions

To develop the investment model, the following four working assumptions have
been made:
(1) The variables in the model are Y, the quality characteristic, and I, the quality
investment.
(2) Both the mean and standard deviation are functions of quality investment. In
practice a finite number of investment levels are considered; hence, there would be
a finite number of values for the mean and standard deviation of the process after
an investment is made. For instance, for investment Ii , the process parameters
would be Ii and Ii . With this view, we consider, I and I to be the mean and
standard deviation associated with quality investment I. The values of I and I
are defined as per Chen and Tsou (2003) to be:
2
I2 L2 M
 L2 eI ,
2
2
2
I T 0  2T eI ,

40
 4 0,

2
is the maximum (before investment) level of the variance and L2 is the
where, M
minimum achievable level of the variance. Also,  0 is the initial value of the mean
at the decision time, and  T is the means target value. Since, the initial and target
values are known, the parameters  and  could be found through regression
analysis of historical data.

(3) The process density function will have one more parameter I, the investment level
as shown below:
f Y, I

YI 2
2 2
I


1
p e
I 2

(4) Poor quality cost is the integral of Taguchi loss function, L(Y ), times the density
function, from LSL to USL as shown below:
Z

USL

Poor quality cost=unit

LSL

KY  T 2  f Y, I dY:

International Journal of Production Research

7367

4.2 Model derivation

Considering the above working assumptions, and adding the cost of investment to the
expected cost model, we arrive at:
Z1
ECY, I Pc Mc Ic Rc
f Y, I dY
USL
Z LSL
2Pc 2Mc Ic Sc
f Y, I dY
1
Z USL

Pc Mc KY  T 2 Ic  f Y, I dY I:

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

LSL

Due to symmetry the first two integrals are equal, hence we can further simplify our
model of expected cost and attempt to minimise it subject to two simple constraints,
and we arrive at our investment model:
Minimise:
Z LSL
TCY, I 3Pc 3Mc 2Ic Rc Sc
f Y, I dY
1
Z USL
Pc Ic Mc
f Y, I dY
LSL
Z USL
LY  f Y, I dY I:

LSL

Subject to:
Y0

and I  0:

The aim of this model is to determine the optimal level of investment to minimise the
total expected cost.
In the next section, a numerical example is presented to demonstrate how the two
models work together.

5. Numerical example
The manufacturing facility used as an example belongs to a seat manufacturing company,
which is a prime supplier of car seats for one of the big three car companies. The facility is
located on the outskirts of the city of Windsor in Ontario, Canada. In a two-shift
operation, more than 500 car seats are produced. The operations are performed in
different workstations of the facility and parts and semi-assemblies are carried to proper
locations on pallets. The main activities involved in making a car seat include: back build
(frame) for the seat and the headrest; foaming of the seat and head rest; skinning of the
foamed frames; coupling of the headrest to the seat; and some functional tests. The study
was conducted by one of the authors before the 20082009 meltdown of the auto industry.
The operation used as an example in this paper includes the following information. Car
seats in lots of 280 seats per shift and operates two shifts per day. The Production Manager
has identified a dimensional problem in the base frame assembly, where a large number of
seats are taken back to the rework area because of a failure in the functional test.
The Production Manager wants to determine how much investment is necessary in order
to address the problem. The input parameters of this situation are given in Table 1.

7368

W. Abdul-Kader et al.
Table 1. The input parameters of the car seat problem.

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

Target process mean

Current process mean
Current standard deviation
Taguchi loss constant
Variance curve constant
Mean curve constant
Manufacturing cost
Part cost
Rework cost
Scrap cost
Inspection cost

402 mm
402.86 mm
0.66
$25.00
0.00362
0.0105
$11.03
$45.00
$11.03
$12.00
$2.00

T


K


Mc
Pc
Rc
Sc
Ic

Table 2. The outputs of the tolerance model.

Optimal Z
Optimal tolerance t
Lower specification limit LSL
Upper specification limit USL

3.15
2.07 mm
399.93
404.07

Table 3. The outputs of the investment model.

Optimal investment I
Optimal mean I
Optimal standard deviation I
Total costs per item, TC

$663.38
402.0 mm
0.1986
$61.38

5.1 Solution procedure

Plugging the input parameters into the tolerance model and solving it we obtain the values
presented in Table 2. Tolerance t Z 3.15  0.66 2.07 mm. Thus, for T 402 mm,
the optimal specification would be: LSL 399.93 mm and USL 404.07 mm.
Utilising the specification obtained from the tolerance model, plus T 402 mm,
 0.66 mm into the investment model and solving it, using Maple 10 software, we arrive at
the optimal value of the required investment and process parameters I and I as shown
in Table 3.
This means that an investment of $663.38 should adjust the mean to 402 mm and the
standard deviation to 0.1986 mm. This results in an average cost per seat of $61.38. The
lower cost per seat has been achieved mostly through reduction in reworks/scraps.

6. Conclusions
In this paper, we have presented an integrated cost model composed of a tolerance model
and an investment model. Our primary objective has been to study the interactions
between cost of production and process quality to develop a tool for deciding how to
reduce the extra costs of rework/scrap. With this view, we have developed the cost models
based on the relevant manufacturing costs and Taguchis model of quality loss. This model
can be applied in any manufacturing process where excess variability in quality
characteristics causes defects and process wastes. The primary contribution of the

International Journal of Production Research

7369

integrated model is the fact that the production manager can utilise the model to take
optimal investment decisions to correct a defective process. Comparison can also be made
between the expected unit costs before and after the process modification. In summary, the
most important contribution of this paper is the synthesis of the existing knowledge into a
usable tool for decision making purposes. Future research could focus on two areas: first,
on how the process parameters including optimal investment change if the process follows
distributions other than normal distribution; and second, on how the model can be
expanded to encompass scenarios with multiple quality characteristics.

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

Acknowledgements
The authors would like to acknowledge anonymous referees for the helpful comments regarding the
first draft of the paper. They would like also to acknowledge the financial support of the Natural
Sciences and Engineering Council of Canada with regard to this project.

References
Affisco, J.F., Paknejad, M.J., and Nasri, F., 2002. Quality improvement and setup reduction in the
joint economic lot size model. European Journal of Operational Research, 142 (3), 497508.
Boucher, T.O. and Jafari, M.A., 1991. The optimum target value for single filling operations with
quality sampling plans. Journal of Quality Technology, 23 (1), 4447.
Byrne, D.M. and Taguchi, S., 1986. The Taguchi approach to parameter design. ASQC Quality
Congress Transactions, Anaheim, CA, 177, 168173.
Cain, M. and Janssen, C., 1997. Target selection in process control under asymmetric costs. Journal
of Quality Technology, 29 (4), 464468.
Cardenas-Barron, L.E., 2009. On optimal batch sizing in a multi-stage production system with
rework consideration. European Journal of Operational Research, 196 (3), 12381244.
Chan, W.M., Ibrahim, R.N., and Lochert, P.B., 2005. Economic production quantity and process
quality: a multivariate approach. International Journal of Quality & Reliability Management,
22 (6), 591606.
Chase, K.W. and Greenwood, W.H., 1988. Design issues in mechanical tolerance analysis.
Manufacturing Review, 1 (1), 5067.
Chen, C.H., Chou, C.Y., and Huang, K.W., 2002. Determining the optimum process mean under
quality loss function. International Journal of Advanced Manufacturing Technology, 20 (8),
598602.
Chen, C.H., 2006. The modified Pulak and Al-Sultans model for determining the optimum process
parameters. Communications in Statistics Theory and Methods, 35 (10), 17671778.
Chen, J.-M. and Tsou, J.-C., 2003. An optimal design for process quality improvement: modeling
and application. Production Planning and Control, 14 (7), 603612.
Chiu, S.W. and Chiu, Y.P., 2003. An economic production quantity model with the rework process
of repairable defective items. Journal of Information & Optimization Sciences, 24 (3), 569582.
Chiu, S.W., 2007. Optimal replenishment policy for imperfect quality EMQ model with rework and
backlogging. Applied Stochastic Models in Business and Industry, 23 (2), 165178.
Chiu, Y.P., 2003. Determining the optimal lot size for the finite production model with random
defective rate, the rework process, and backlogging. Engineering Optimization, 35 (4), 427437.
Fine, C.H. and Porteus, E.L., 1989. Dynamic process improvement. Operations Research, 37 (4),
580591.
Ganeshan, R., Kulkarni, S., and Boone, T., 2001. Production economics and process quality: a
Taguchi perspective. International Journal of Production Economics, 71 (13), 343351.

Downloaded by [University of New Hampshire] at 07:10 28 February 2013

7370

W. Abdul-Kader et al.

Hong, J.D. and Hayya, J.C., 1993. Process quality improvement and setup reduction. International
Journal of Production Research, 31 (11), 26932708.
Jeang, A. and Yang, K., 1992. Optimum tool replacement with nondecreasing tool wear.
International Journal of Production Research, 30 (2), 299314.
Jeang, A., 1997. An approach of tolerance design for quality improvement and cost reduction.
International Journal of Production Research, 35 (5), 11931211.
Jeang, A., 2001. Combined parameter and tolerance design optimization with quality and cost.
International Journal of Production Research, 39 (5), 923952.
Kapur, K.C. and Wang, C.J., 1987. Economic design of specification based on Taguchis concept of
quality loss function. Quality: design, planning, and control. R.E. Devor and S.G. Kapoor, eds.
The Winter annual meeting of the American Society of Mechanical Engineers, Boston, 2326.
Kulkarni, S. and Prybutok, V., 2004. Process investment and loss functions: models and analysis.
European Journal of Operational Research, 157 (1), 120129.
Kulkarni, S.S., 2008. Loss-based quality costs and inventory planning: general models and insights.
European Journal of Operational Research, 188 (2), 428449.
Liao, G.L., Chen, Y.H., and Sheu, S.H., 2009. Optimal economic production quantity policy for
imperfect process with imperfect repair and maintenance. European Journal of Operational
Research, 195 (2), 348357.
Liu, X. and Cetinkaya, S., 2007. A note on quality improvement and setup reduction in the joint
economic lot size model. European Journal of Operational Research, 182 (1), 194204.
Ouyang, L.-Y. and Chang, H.C., 2000. Impact of investing in quality improvement on (Q, r, L) model
involving the imperfect production process. Production Planning & Control, 11 (6), 598607.
Ouyang, L.-Y., Chen, C.-K., and Chang, H.C., 2002. Quality improvement, setup cost and lead-time
reductions in lot size recorder point models with an imperfect production process. Computers
& Operations Research, 29 (12), 17011717.
Peng, H.P., et al., 2008. Optimal tolerance design for products with correlated characteristics by
considering the present worth of quality loss. International Journal of Advanced Manufacturing
Technology, 39 (12), 18.
Pulak, M.F.S. and Al-Sultan, K.S., 1996. The optimum targeting for a single filling operation with
rectifying inspection. Omega The International Journal of Management Science, 24 (6),
727733.
Raiman, L.B. and Case, K.E., 1990. Monitoring continuous improvement using the Taguchi loss
function. In: Proceedings of the international industrial engineering conference, 2023 May,
San Francisco, California, 391395.
Sarker, B.R., Jamal, A.M.M., and Mondal, S., 2008. Optimal batch sizing in a multi-stage production
system with rework consideration. European Journal of Operational Research, 184 (3), 915929.
Spiring, F.A., 1993. The reflected normal loss function. The Canadian Journal of Statistics, 21 (3),
321330.
Spiring, F.A. and Yeung, A.S., 1998. A general class of loss functions with industrial applications.
Journal of Quality Technology, 30 (2), 152160.
Taguchi, G., 1986. Introduction to quality engineering. Asian Productivity Organization (distributed
by American Supplier Institute Inc., Dearborn, MI).
Taguchi, G., Elsayed, A., and Hsiang, T.C., 1989. Quality engineering in production systems. Book
series: industrial engineering and management science. New York: McGraw Hill.
Tsou, J.-C. and Chen, J.-M., 2005. Dynamic model for a defective production system with pokayoke. The Journal of the Operational Research Society, 56 (7), 799803.
Tsou, J.C., 2006. Decision-making on quality investment in a dynamic lot sizing production system.
International Journal of Systems Science, 37 (7), 463475.
Vokurka, R.I and Davis, R.A., 1996. Quality improvement implementation: a case study in
manufacturing scrap reduction. Production and Inventory Management Journal, 37 (3), 6368.
Wen, D. and Mergen, A.E., 1999. Running a process with poor capability. Quality Engineering,
11 (4), 505509.