Quality Technology & Quantitative Management

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Economic Design of Specifications for 100%

Inspection with Imperfect Measurement Systems

Qianmei Feng & Kailash C. Kapur

To cite this article: Qianmei Feng & Kailash C. Kapur (2006) Economic Design of Specifications
for 100% Inspection with Imperfect Measurement Systems, Quality Technology & Quantitative
Management, 3:2, 127-144, DOI: 10.1080/16843703.2006.11673105

To link to this article: https://doi.org/10.1080/16843703.2006.11673105

Published online: 09 Feb 2016.

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 Quality Technology &
Quantitative Management
Vol. 3, No. 2, pp. 127-144, 2006
QTQM
© ICAQM 2006

Economic Design of Specifications for 100%

Inspection with Imperfect Measurement Systems
Qianmei Feng1 and Kailash C. Kapur2
1
Department of Industrial Engineering, University of Houston, Houston, TX, USA
2
Industrial Engineering, University of Washington, Seattle, WA, USA
(Received June 2005, accepted September 2005)
______________________________________________________________________
Abstract: 100% inspection plays an important role in today’s environment, such as airport security. The
same is true for some industrial or other decision-making processes where the consequences of excessive
deviations from target values are very high. We investigate the economic and statistical effects of inspection
error on the design of specifications due to imperfect measurement systems. Two models are developed for
single quality characteristic with consideration of inspection error under assumptions of constant and
variable inspection costs. Models for bivariate quality characteristics are also proposed with considerations
of inspection error. Numerical examples are given to illustrate the presented models which can be applied
for the disposition of the output of any process for quality improvement.

Keywords: 100% inspection, bivariate quality characteristics, inspection error, optimal specifications,
single quality characteristics.
______________________________________________________________________

1. Introduction

T he common wisdom for airport security is to do 100% inspection of passengers as well

as of the items carried by them to eliminate all non-conforming items, rather than
sampling inspection that is sometimes used in the field of quality. Since we have to do 100%
inspection, the question remains “what specification limits for different quality
characteristics should be used for this inspection or screening or measurement process?” A
lot of evidences from different airports have shown that error occurs frequently in inspection
conducted by inspectors or devices. Therefore, the effects of inspection error should be
considered in developing the specification limits. Though this airport security screening is a
complex process with many unknown economic and social consequences, the purpose of
this paper is to address similar problems for many other industrial or decision making
processes, and to investigate the economic and statistical effects of inspection error on the
design of specifications.
The first framework for developing the optimal specifications was presented by
Kapur [6], Kapur and Wang [7], and Kapur [8]. A general optimization model was
developed to minimize the total cost to both the producer and the customer, while utilizing
the quality loss function based on some of the contribution of Taguchi’s work in [12]
and [13]. If a process has been improved to its best capability using the present technology,
then a decision maker has to choose between the following two decisions:
Decision 1. No inspection is done, and thus we ship the whole distribution of the output to
the next customer. One economic interpretation of cost to the downstream customers is the
expected quality loss L = ∫ all y L ( y ) f ( y ) dy , where f ( y ) is the probability density
function for the response random variable Y and L ( y ) is the associated loss function.
128 Feng and Kapur
Decision 2. Do 100% inspection. It is clear that we will do the inspection and truncate the
tails of the distribution only if it reduces total cost to both the producer and the consumer. If
some arbitrary specification limits are applied, we may very well increase the total cost by
doing inspection. When we truncate the distribution by using certain specification limits,
some additional costs will incur, such as the inspection cost, and the scrap cost. The general
optimization model where we minimize the expected total cost per shipped unit is

Minimize ETC = EQL + ESC + EIC (1)

with respect to specification limits, which are decision variables in this model. Here, ETC
is the expected total cost per unit; EQL is the expected quality loss per unit; ESC is the
expected scrap cost per unit; and EIC denotes the expected inspection cost per unit.
Based on this general optimization model, different models have been formulated by
Kapur [6], Kapur and Wang [7], and Kapur and Cho [9] [10]. In terms of the inspection
error, Hong and Elsayed [4], Tang and Schneider [14] discussed the effects of inspection
error on a complete inspection plan for a single quality characteristic. They assumed that the
inspection is unbiased and the imprecision of measurement is independent of the true value
of the quality characteristic. Using the similar assumptions on measurement precision and
additional assumptions on the inspection costs associated with inspection error, we present
models to develop the optimal specifications to minimize the expected total cost per unit
shipped rather than per unit produced. Furthermore, the model for bivariate quality
characteristics is proposed with the consideration of inspection errors.

2. Models for Single Quality Characteristic

For the purpose of comparison, we first review the model without consideration of
inspection error, which is given in Model 1. With consideration of inspection error, we
present two models according to the different natures of inspection costs: Model 2 is
developed for the case of constant inspection cost, and Model 3 is designed for the case of
variable inspection costs that are associated with different inspection errors. The objective
functions of the three optimization models are the expected total cost per shipped unit that
is based on the final output of the system.
2.1. Model 1: No Inspection Error
Let Y be the “target the best” quality characteristic. f ( y ) denotes the probability
density function of Y , which is assumed to follow a normal distribution with mean µ
and standard deviation σ . The quadratic quality loss function is symmetric about the target
value, y0 , and is given by

L ( y ) = k ( y − y0 ) 2 . (2)

Since the quality loss function is symmetric about y0 , the process mean should be
centered at the target, i.e., µ = y0 , and the specification limits are also symmetric about the
process mean, consisting of a lower limit µ − δ1 and an upper limit µ + δ1 . Hence, if the
observed value of Y is outside the interval ( µ − δ1 , µ + δ1 ) , the item is rejected and
scrapped. The expected quality loss ( EQL1 ) and expected scrap cost ( ESC1 ) are carefully
derived and given below:

⎡ ⎛δ ⎞ 2δ ⎛ δ ⎞ ⎤
EQL1 = kσ 2 ⎢ 2Φ ⎜ 1 ⎟ − 1 − 1 φ ⎜ 1 ⎟ ⎥ ,
⎣ ⎝σ ⎠ σ ⎝ σ ⎠⎦
Economic Design of Specifications for 100% Inspection 129

⎡ ⎛ δ ⎞⎤
ESC1 = SC ⎢ 2 − 2Φ ⎜ 1 ⎟ ⎥ ,
⎣ ⎝ σ ⎠⎦
where SC is the scrap cost per unit, Φ (⋅) and φ (⋅) are the cumulative distribution and
probability density functions respectively for a standard normal variable.
If we denote the fraction of shipped unit as q , we have

⎛δ ⎞
q = ∫µµ−+δδ11 f ( y )dy = 2Φ ⎜ 1 ⎟ − 1.
⎝σ ⎠
Thus the expected total cost per shipped unit is

1
ETC1 = ( EQL1 + ESC1 + IC )
q

1 ⎧ 2 ⎡ ⎛ δ1 ⎞ 2δ1 ⎛ δ1 ⎞ ⎤ ⎡ ⎛ δ ⎞⎤ ⎫
= ⎨kσ ⎢ 2Φ ⎜ ⎟ − 1 − φ ⎜ ⎟ ⎥ + 2SC ⎢1 − Φ ⎜ 1 ⎟ ⎥ + IC ⎬ , (3)
⎛ δ1 ⎞ ⎩ ⎣ ⎝ σ⎠ σ ⎝ σ ⎠⎦ ⎣ ⎝ σ ⎠⎦ ⎭
2Φ ⎜ ⎟ − 1
⎝σ ⎠
where IC is the inspection cost per unit. The minimum value of ETC1 with respect to δ1
can be obtained by optimization methods.
2.2. Model 2: With Inspection Error and Constant Inspection Cost
When considering the inspection error, the observed value of a quality characteristic is
different from the true value of the same quality characteristic. We denote the observed
value of Y as X . The conditional distribution of X given Y is assumed as a normal
distribution, X |Y ∼ N ( y,σ e2 ) , which implies that the observed value is unbiased and the
variability of measurements is independent of Y as assumed by Hong and Elsayed [4],
Tang and Schneider [14]. The variance of the measurements, σ e2 , can be estimated using an
experiment where the potential sources of variation are changed systematically as described
by Czitrom and Spagon [2]. Given the conditional probability density function, g ( x | y ) ,
the joint distribution of X and Y is

h ( x, y ) = g ( x | y ) f ( y ) ,

where
( y − µ )2 ( x − y )2
−
1 − 1 2σ e2
f ( y) = e 2σ 2 and g ( x | y ) = e .
2πσ 2πσ e

The marginal distribution of X is obtained by

∞
m ( x ) = ∫−∞ h( x , y )dy,

and the posterior conditional distribution of Y given X is obtained by

h( x , y )
p( y|x ) = .
m( x )

Let α = 1/σ e2 and β = 1/σ 2 , we proved that both X and Y | X are normal variables, and
130 Feng and Kapur

⎛ α x + βµ −1 ⎞
X ∼ N ( µ ,1/α + 1/β ) and Y | X ∼ N ⎜ , (α + β ) ⎟ .
⎝ α +β ⎠
Because of the inspection error, the inspection result or the observed value X is used
as the criterion to determine whether or not an item is rejected, rather than the true value Y .
As a result, if the specification limits are ( µ − δ 2 , µ + δ 2 ) , the rejection area and acceptance
area can be shown in Figure 1.

Figure 1. Acceptance and rejection areas.

Using the same quality loss function in Equation (1), the expected quality loss per item
is calculated for the acceptance area as

EQL2 = ∫µµ−+δδ22 ∫−∞

∞
L ( y )h ( x , y )dydx

= ∫µµ−+δδ22 ∫−∞
∞
k ( y − y0 ) 2 p ( y | x )m ( x )dydx

⎡⎛ α x + βµ ⎞
2
1 ⎤
= ∫µµ−+δδ22 km ( x ) ⎢⎜ − y0 ⎟ + ⎥ dx
⎢⎣⎝ α + β ⎠ α + β ⎥⎦

kα 2 µ +δ 2 2 2 kα ⎛ βµ ⎞
= 2 ∫µ −δ 2
x m ( x )dx + ⎜ − y0 ⎟ ∫µµ−+δδ22 xm ( x )dx
(α + β ) α +β ⎝α + β ⎠

⎡⎛ βµ ⎞
2
1 ⎤ µ +δ 2
+ k ⎢⎜ − y0 ⎟ + ⎥ ∫µ −δ 2 m ( x )dx .
⎢⎣⎝ α + β ⎠ α + β ⎥⎦
For a normal random variable X ∼ N ( µ ,1/α + 1/β ) with p.d.f m ( x ) , the following
formulas are derived:
Economic Design of Specifications for 100% Inspection 131

µ +δ ⎡ ⎛ δ2 ⎞ ⎤
∫µ −δ 22 xm ( x )dx = µ ⎢ 2Φ ⎜ ⎟ − 1⎥ ,
⎢⎣ ⎝ σ m ⎠ ⎥⎦

µ +δ ⎡ ⎛ δ2 ⎞ ⎤ ⎛ δ2 ⎞
∫µ −δ 22 x m ( x )dx = ( µ + σ m ) ⎢ 2Φ ⎜ ⎟ − 1⎥ − 2δ 2σ mφ ⎜
2 2 2
⎟,
⎣⎢ ⎝ σ m ⎠ ⎥⎦ ⎝σm ⎠

where σ m = 1/α + 1/β is the standard deviation of X . Then the expected quality loss,
EQL2 is calculated as
3
k ⎤⎡ ⎛ δ ⎞ ⎤ 1
⎡ ⎛ α ⎞2 −2 ⎛ δ2 ⎞
EQL2 = ⎢ k ( µ − y0 ) 2 + ⎥ ⎢ 2Φ ⎜ 2 −
⎟ ⎥1 − 2 k δ 2⎜ ⎟ β φ⎜ ⎟.
⎣ β ⎦ ⎣⎢ ⎝ σ m ⎠ ⎦⎥ ⎝α + β ⎠ ⎝σm ⎠
If the process mean is centered at the target value, µ = y0 , then the expected quality
loss is simplified as
3
k ⎡ ⎛ δ2 ⎞ ⎤
1
⎛ α ⎞2 − 2 ⎛ δ2 ⎞
EQL2 = ⎢ 2Φ ⎜ ⎟ − 1⎥ − 2 kδ 2 ⎜ ⎟ β φ⎜ ⎟
β ⎢⎣ ⎝ σ m ⎠ ⎥⎦ ⎝α + β ⎠ ⎝ σm ⎠
If we denote the fraction shipped to the customer as q , we have

⎛δ ⎞
q = ∫µµ−+δδ22 m ( x )dx = 2Φ ⎜ 2 ⎟ − 1,
⎝ σm ⎠
and the expected scrap cost is ESC 2 = SC (1 − q ).

Then the expected total cost per shipped unit is

1
ETC 2 = ( EQL2 + ESC 2 + IC )
q

⎡ 3
⎤
k 1 ⎢
1
⎛ α ⎞2 −2 ⎛ δ2 ⎞ ⎛ ⎛δ ⎞⎞ ⎥
= − 2 kδ 2 ⎜ ⎟ β φ⎜ ⎟ + 2SC ⎜ 1 − Φ ⎜ 2 ⎟ ⎟⎟ + IC ⎥ . (4)
β ⎢ ⎜
⎛δ ⎞
2Φ ⎜ 2 ⎟ − 1 ⎣⎢ ⎝α + β ⎠ ⎝σm ⎠ ⎝ ⎝σm ⎠⎠
⎦⎥
⎝σm ⎠
ETC 2 with respect to δ 2 is obtained by global search methods in the numerical example
illustrated later.

2.3. Model 3: With Inspection Error and Variable Inspection Cost

In Model 2, the inspection cost is defined as a constant value. In many practical
situations, it is well understood that the imprecision of the measurement system impacts the
inspection cost, i.e. devices with higher precision cost more. We can describe the inspection
cost as a function of imprecision of the measurement system, which is denoted as I c (σ e ) .
Typically, the inspection cost function is a non-increasing function of σ e . With this
inspection cost function, the expected total cost per shipped unit is obtained by substituting
IC in Equation ETC2 with I c (σ e ) :

1
ETC 3 = [ EQL3 + ESC 3 + I c (σ e )]
q
132 Feng and Kapur

⎡ 3
⎤
k 1 ⎢
1
⎛ α ⎞2 −2 ⎛ δ3 ⎞ ⎛ ⎛ δ3 ⎞⎞ ⎥ . (5)
= − 2 kδ 3 ⎜ ⎟ β φ⎜ ⎟ + 2SC ⎜⎜ 1 − Φ ⎜ + I (
⎟ ⎟⎟ c e ⎥σ )
β ⎛ δ3 ⎞ ⎢ ⎝ α+β ⎠ ⎝σm ⎠ ⎝ ⎝σm ⎠⎠
2Φ ⎜ ⎟ − 1 ⎢⎣ ⎥⎦
⎝σm ⎠

2.4. Numerical Examples for Single Quality Characteristic

Consider a problem of filling an expensive chemical in a can at a chemical company.
The fill volume of an automated machine used for filling cans of this chemical is normally
distributed with a mean 10.0 fluid ounces and a standard deviation of 0.50 fluid ounce
( µ = 10 and σ = 0.50 ). The labeled volume on the can is 10.0 fluid ounces, which is the
target value, y0 . It is assumed that the loss caused by the deviation from the target is a
quadratic function symmetric about the target value, and it is L ( y ) = 5( y − y0 ) 2 . The scrap
cost for an out-of-specification can is $2.00 . The inspection cost per can associated with the
measurement machine is $0.10 .
Model 0: No inspection at all
Without inspection, the expected total cost is the expected quality loss:
+∞
ETC 0 = E [ L (Y )] = ∫−∞ k ( y − y0 ) 2 f ( y )dy = k[( µ − y0 ) 2 + σ 2 ] = 5 × 0.52 = $1.250.

Model 1: 100% inspection without inspection error

The optimization model for 100% inspection without consideration of inspection error
is given by Equation (3) as

1⎧ ⎡ ⎛δ ⎞ δ ⎛ δ ⎞⎤ ⎡ ⎛ δ ⎞⎤ ⎫
Min ETC1 = ⎨5(0.5) 2 ⎢ 2Φ ⎜ 1 ⎟ − 1 − 2 1 φ ⎜ 1 ⎟ ⎥ + 2 × 2.00 ⎢1 − Φ ⎜ 1 ⎟ ⎥ + 0.10 ⎬
q⎩ ⎣ ⎝σ ⎠ σ ⎝ σ ⎠⎦ ⎣ ⎝ σ ⎠⎦ ⎭
⎛δ ⎞
Subject to δ1 ≥ 0 , where q = 2Φ ⎜ 1 ⎟ − 1.
⎝σ ⎠
The optimal solution found by genetic algorithm [5] is: δ1∗ = 0.79, and
ETC1∗ = $1.110 . Since $1.110 < $1.250 , we should do the 100% inspection with the
optimal specification limits (9.21,10.79) , when there is no inspection error.

Model 2: 100% inspection with inspection error and constant inspection cost
It is reported that the measurement machine used for inspecting the fill volume of cans
is not perfect, and the standard deviation caused by inspection error is σ e = 0.05 . Thus we
have α = 1/σ e2 = 400 , β = 1/σ 2 = 4 and σ m = 1/α + 1/β = 1/ 400 + 1/ 4 . Using
Equation (4), the optimization model is given as below:

5 1⎡ ⎤
3
⎛ 400 ⎞ 2 − 12 ⎛ δ 2 ⎞ ⎛ ⎛ δ2 ⎞⎞
Min ETC 2 = − ⎢2 × 5δ 2 ⎜ ⎟ 4 φ ⎜ ⎟ + 2 × 2 . 00 ⎜ 1 − Φ ⎜ ⎟ ⎟ + 0. 10 ⎥
⎜ ⎟
4 q⎢
⎣ ⎝ 404 ⎠ ⎝σm ⎠ ⎝ ⎝ σm ⎠⎠ ⎥⎦

⎛δ ⎞
Subject to δ 2 ≥ 0 , where q = 2Φ ⎜ 2 ⎟ − 1.
⎝ σm ⎠

The optimal solution found by genetic algorithm [5] is δ 2∗ = 0.80, and

Economic Design of Specifications for 100% Inspection 133
∗
ETC 2 = $1.115 . Since $1.115 < $1.250 , we will do the 100% inspection even when the
inspection error exists. Now the specification limits are (9.20,10.80) , which is a little wider
than the case without inspection error, given by Model 1.

Sensitivity analysis for Model 2

When inspection error exists, we are interested in the effects of the precision of
measurement systems on the total cost and specifications. Since the precision of a
measurement system is affected by the variance, σ e2 , we change the ratio of σ e /σ ( σ
keeps the same value) and observe the tendency of ETC 2∗ in Figure 2. It is clear that
ETC 2∗ increases as σ e increases. When σ e = 0 , it is the case for no inspection error,
where ETC1∗ = $1.110 . In addition, the lines of ETC 2∗ and ETC 0 cross at around
σ e /σ = 0.68 , which is the threshold of two decisions: 100% inspection when σ e /σ < 0.68 ;
no inspection at all when σ e /σ > 0.68 . Also we can see from Figure 2 that the optimal
specifications become wider when the ratio of σ e /σ increases. However, the effects are
insignificant when σ e is very small or the inspection precision is very high.
The other parameter that affects the inspection decision is the scrap cost. It is well
understood that when the scrap cost is relatively high compared to other costs, we tend not
to do inspection in order to minimize the total cost; when the scrap cost is negligible, the
specification limits can be very tight for the same reason. It can be observed from Figure 3
and Figure 4, in which ETC 2∗ , LSL , and USL are plotted to the ratio of SC /IC and
SC /k .

ETC2*
1.35
1.3

1.25 ETC0

1.2
1.15
1.1
ETC1* 0 0.2 0.4 0.6 0.8 1 1.2
σ e/σ
USL & LSL
12

11.5
USL
11

10.5

10

9.5

8.5
LSL
8
0 0.2 0.4 0.6 0.8 1 1.2

σe/σ

Figure 2. The effects of σ e /σ on ETC 2∗ , LSL and USL.

134 Feng and Kapur

ETC2*

1.5

0.5

0
0 20 40 60 80 100 120
SC/IC
USL & LSL
12
USL
11

10

9
LSL
8
0 20 40 60 80 100 120
SC/IC
Figure 3. The effects of SC /IC on ETC2∗ , LSL and USL.

ETC2*
1.5

0.5

0
0 0.5 1 1.5 2 2.5
SC/k
USL & LSL
12
USL
11

10

9
LSL
8
0 0.5 1 1.5 2 2.5
SC/k

Figure 4. The effects of SC /k on ETC2∗ , LSL and USL.

Economic Design of Specifications for 100% Inspection 135

Model 3: 100% inspection with inspection error and variable inspection cost
In many cases, a company has choices as for the selection of the measurement system.
Suppose we have seven measurement systems to choose from for inspection, and each
system has different precision level with different inspection cost as given in Table 1. The
inspection cost is a non-increasing discrete function of σ e rather than a constant, which is
also shown in Figure 5. An optimization procedure using genetic algorithm is implemented
to minimize the expected total cost with this discrete function in Equation (5). The resulted
ETC 3∗ for each measurement system is shown in Figure 5. The optimal ETC 3∗ depends
heavily on the magnitude of I c (σ e ) . We can see that the minimum expected total cost is
obtained by using the fourth measurement system, whose imprecision is σ e = 0.040 . The
corresponding optimal specifications are (9.21, 10.79).

ETC3* Ic(σ e)
1.135 0.125

1.13
ETC3* 0.12
0.115
1.125 0.11
1.12 0.105
Ic(σe) 0.1
1.115
0.095
1.11 0.09
0 0.02 0.04 0.06 0.08 0.1 0.12
σe

Figure 5. ETC ∗
3 and I c (σ e ) for seven measurement systems.

Table 1. Data for seven measurement systems.

System 1 2 3 4 5 6 7
σe 0.001 0.010 0.030 0.040 0.050 0.070 0.100
I c (σ e ) ($) 0.1200 0.1100 0.1030 0.1012 0.1000 0.0985 0.0980

3. Models for Bivariate Quality Characteristics

From the viewpoint of the customer, a product is sometimes evaluated on the basis of
multiple quality characteristics. For instance, the overall quality of a metal cutting tool is
evaluated based on several characteristics such as cutting force, cutting speed, and metal
removal rate. To simplify the illustration, we start the study from bivariate quality
characteristics. Two continuous quality characteristics of a discrete product are of interest.
If a 100% inspection plan is employed, the two quality characteristics of each product are
inspected. If both quality characteristics pass the inspection, a product is accepted by the
next customer with quality losses due to variability; if either of the two quality
characteristics falls out of specification limits, a product is scrapped with certain scrap cost
per unit that is assumed to be a constant, denoted by SC . Also the inspection cost per unit
is a constant, IC . The total cost we are interested in includes the expected quality loss to
customers, the scrap cost and the inspection cost. The inspection error exists so that the
observed values are not the exact values of the two quality characteristics. These two quality
characteristics follow a bivariate normal distribution. For purpose of comparison, we discuss
the case without consideration of inspection error first.
136 Feng and Kapur
3.1. 100% Inspection Without Inspection Error
Let random variables Y1 and Y2 represent the two “target the best” quality
characteristics of interest. We assume that the joint distribution of Y1 and Y2 is a bivariate
normal distribution Y ∼ N 2 ( µ ,Σ) with mean vector µ = ( µ1 , µ2 ) , and covariance
matrix
⎛ σ 12 σ 12 ⎞
Σ=⎜ ⎟ .
⎜σ σ 22 ⎟⎠
⎝ 12

The probability density function f ( y1 , y2 ) is given by

1 ⎧⎪ 1 ⎡ ( y1 − µ1 ) 2 ( y1 − µ1 )( y2 − µ2 ) ( y2 − µ2 ) 2 ⎤ ⎫⎪
f ( y1 , y2 ) = exp ⎨− 2 ⎢
− 2 ρ + ⎥ ⎬,
2πσ 1σ 2 1− ρ2 ⎪⎩ 2(1 − ρ ) ⎣ σ 1
2
σ 1σ 2 σ 22 ⎦ ⎪⎭

σ 12
where ρ is the correlation of y1 and y2 , and ρ = .
σ 1σ 2
Unlike the case for a single quality characteristic, bivariate quality characteristics form
a specification region by two sets of specification limits, that is, ( µi − δ i , µi + δ i ) for i =1, 2.
The item is rejected if any value of y1 , y2 is outside the interval ( µi − δ i , µi + δ i ) . A
bivariate quality loss function is considered for evaluating quality for such systems [10]:

L ( y1 , y2 ) = k1 ( y1 − t1 ) 2 + k12 ( y1 − t1 )( y2 − t 2 ) + k2 ( y2 − t 2 ) 2 ,

where k1 , k12 , and k2 are positive constants, t1 and t 2 are the target values of the two
quality characteristics. The process means can be adjusted to the target values, and thus we
have µ1 = t1 and µ2 = t 2 . From now on, we use Y1 and Y2 to denote the quality
deviations between the quality characteristics and the target values to facilitate the derivation.
Without loss of generality, the bivariate quality loss function is rewritten as
L ( y1 , y2 ) = k1 y12 + k12 y1 y2 + k2 y22 .
The expected quality loss can be computed by EQL11 = ∫−+δδ22 ∫−+δδ11 L ( y1 , y2 ) f ( y1 , y2 )dy1dy2 ,
where y1 and y2 are the deviations between the quality characteristics and the target
values. The model to develop the specification region based on the expected total cost per
shipped unit is
1
Min ETC11 = [ EQL11 + SC (1 − q ) + IC ] , (6)
q
where EQL11 = ∫−+δδ22 ∫−+δδ11 ( k1 y12 + k12 y1 y2 + k2 y22 ) f ( y1 , y2 )dy1dy2 , q = ∫−+δδ22 ∫−+δδ11 f ( y1 , y2 )dy1dy2 .
A similar model was developed for the expected total cost per produced unit by Kapur
and Cho [10], but they did not pursue the case with consideration of inspection error.

3.2. 100% Inspection With Inspection Error

Let X be the vector of observed values of the true quality characteristics Y , where
X = ( X1 , X 2 ) and Y = (Y1 , Y2 ) . We assume that the observed values are unbiased and the
variabilities of measurement are independent of the true values. Assuming the joint
distribution of Y1 , Y2 is a bivariate normal variate, Y ∼ N 2 (0,Σ) , the conditional
distribution of X 1 , X 2 given Y1 is also a bivariate normal variate, i.e.,
Economic Design of Specifications for 100% Inspection 137

⎛ σ e21 σ e12 ⎞
X |Y = y ∼ N 2 ( y,Σ e ) , where y = ( y1 , y2 ), and Σ e = ⎜ ⎟.
⎜σ 2 ⎟
⎝ e12 σ e 2 ⎠
If we denote the probability density function of conditional distribution X |Y= y as
g ( x | y ) , then the joint distribution of X and Y , h( x, y ) , is calculated as

h( x , y ) = g ( x | y ) f ( y ).

The marginal distribution of X , m( x ) , is obtained by

∞ ∞
m ( x ) = ∫−∞ h ( x , y )dy = ∫−∞ g ( x | y ) f ( y )dy,

and the posterior conditional distribution of Y given X , p ( y | x ) , is derived as

h ( x, y ) g (x|y) f ( y)
p ( y|x ) = = .
m(x ) m(x )
One desirable property of normal multivariate distribution is that marginal
distributions and conditional distributions derived from multivariate normal distributions are
also normal distributions, see Anderson [1]. We proved in the Appendix A that
X ∼ N 2 (0, (Σ + Σ e )) , and Y | X ∼ N 2 ((Σ −1 + Σ e−1 ) −1 Σ e−1 x , (Σ −1 + Σ e−1 ) −1 ) . The observed values
X have bigger variability than the quality characteristics Y .
Because of the inspection error, the observed values or the inspection results X are
the criteria to determine whether or not an item is rejected, rather than Y . As a result, the
expected quality loss per unit using the bivariate quality loss function is

EQL22 = ∫−δδ2 2 ∫−δδ1 1 ∫−∞

∞ ∞
∫−∞ L ( y )h( x , y )dy1 dy2 dx1 dx 2

= ∫−δδ2 2 ∫−δδ1 1 ∫−∞

∞ ∞ 2 2
∫−∞ ( k1 y1 + k12 y1 y2 + k2 y2 ) p ( y | x )dy1dy2 m ( x )dx1dx 2 .

If we denote the mean vector of the conditional distribution Y given X ,

−1
(Σ + Σ e−1 ) −1 Σ e−1 x , as
⎛ l1 ( x1 , x 2 ) ⎞
⎜ ⎟,
⎝ l 2 ( x1 , x 2 ) ⎠
where l1 ( x1 , x 2 ) and l 2 ( x1 , x 2 ) are linear functions of x1 , x2 , and the variance matrix,
(Σ −1 + Σ e−1 ) −1 , as
⎛ Σ11 Σ12 ⎞
⎜ ⎟,
⎝ Σ12 Σ 22 ⎠

the expected quality loss is simplified to a double integration in Appendix B as

EQL22 = ∫−δδ2 2 ∫−δδ1 2 {k1 ⎢⎡( l1 ( x1 , x 2 ) ) + Σ11 ⎥⎤ + k2 ⎢⎡( l 2 ( x1 , x 2 ) ) + Σ 22 ⎥⎤

2 2

⎣ ⎦ ⎣ ⎦
+ k12 [ Σ12 + l1 ( x1 , x 2 )l2 ( x1 , x 2 ) ]}m ( x )dx1dx 2 .

The expected scrap cost per unit ESC22 is given by

138 Feng and Kapur

EQL22 = SC ⎡⎣1 − ∫−δδ2 2 ∫−δδ1 1 m ( x )dx1dx 2 ⎤⎦ .

Therefore the expected total cost per shipped unit is obtained as

1
ESC 22 = ( EQL22 + ESC 22 + IC ) (7)
q

=
1 δ 2 δ1
q
{
∫−δ 2 ∫−δ1 k1 ⎡⎣ (l1 ( x1 , x 2 )) + Σ11 ⎤⎦ + k2 ⎡⎣ (l2 ( x1 , x 2 )) + Σ 22 ⎤⎦
2 2

} ( ) 1 1
⎣ 12 + l1 ( x1 , x 2 ) l 2 ( x1 , x 2 ) ⎤⎦ m x dx1dx 2 + q SC (1 − q ) + q IC ,
+ k12 ⎡Σ

where q = ∫−δδ2 2 ∫−δδ1 1 m ( x )dx1dx 2 .

The procedures to develop the model for bivariate quality characteristics can also be
extended to the case for multivariate quality characteristics.

3.3. Numerical Examples for Bivariate Quality Characteristics

Consider a product with bivariate quality characteristics of interest [10]. The two
quality characteristics are the “target the best” with the target values t1 = 10 and t 2 = 20 ,
respectively. Let Y1 and Y2 denote the quality deviations between the quality
characteristics and the target values. The joint distribution of Y1 and Y2 has a bivariate
normal distribution with µ1 = 0, µ2 = 0,σ 12 = 0.5, σ 22 = 0.8, and ρ = 0.6 , that is,

⎛ 0.5 0.3795 ⎞
Σ=⎜ ⎟.
⎝ 0.3795 0.8 ⎠

Furthermore, it is known that k1 = 30, k2 = 25, k12 = 10, SC = 80 , and IC = 2 .

Model 0: No inspection at all

Without inspection, the expected total cost ETC 00 equals to the expected quality loss:
+∞ +∞ 2 2
ETC 00 = E [ L (Y )] = ∫−∞ ∫−∞ ( k1 y1 + k12 y1 y2 + k2 y2 ) f ( y1 , y2 )dy1dy2
= k1[( E [Y1 ]) 2 + V [Y1 ]] + k2 [( E [Y2 ]) 2 + V [Y2 ]] + k12σ 12

= 30 × 0.5 + 25 × 0.8 + 10 × 0.3795

= $38.795.

Model 1: 100% inspection without inspection error

The optimization model for 100% inspection without inspection error is given by
Equation (6) as:

1
Min ETC11 = [ EQL11 + SC (1 − q ) + IC ] ,
q

where EQL11 = ∫−+δδ22 ∫−+δδ11 (30 y12 + 10 y1 y2 + 25 y22 ) f ( y1 , y2 )dy1dy2 , q = ∫−+δδ22 ∫−+δδ11 f ( y1 , y2 )dy1dy2 ,
Economic Design of Specifications for 100% Inspection 139

1 ⎧⎪ −1 ⎛ y12 y1 y2 y22 ⎞ ⎫⎪
f ( y1 , y2 ) = exp ⎨ 2 ⎜⎜ − 2(0 . 6) + ⎟⎬ ,
2π 0.5 0.8 1 − 0.62 ⎪⎩ 2(1 − 0.6 ) ⎝ 0.5 0.5(0.8) 0.8 ⎟⎠ ⎭⎪
0 ≤ δ1 ≤ 6.0σ 1 , 0 ≤ δ 2 ≤ 6.0σ 2 .
The function DBLQUAD in Matlab is used to evaluate the double integrals for the
above bivariate normal distribution. The optimal solutions we found is δ1∗ = 2.20σ 1 ,
δ 2∗ = 2.02σ 2 . Thus the optimum specification limits for Y1 and Y2 are (8.444,11.556) ,
(18.193, 21.807) . With this specification region, the minimum ETC ∗ is $37.479 , which is
smaller than $38.795 , the minimum total cost from Model 0. When there is no inspection
error, we should do the 100% inspection with the specification limits (8.444,11.556) and
(18.193, 21.807) for Y1 and Y2 , respectively.
Model 2: 100% inspection with inspection error
It is reported that the measurement machine used for inspection is not perfect. We
assume that the observed values are unbiased and the variabilities of measurements are
independent of the true values. The variance matrix of the conditional distribution of
X1 , X 2 given Y1 ,Y2 is
⎛ 0.01 0 ⎞
Σe = ⎜ ⎟,
⎝ 0 0.04 ⎠
which implies that the two observed variables are independent. Thus, the marginal
distribution of the observed variables is

⎛ ⎛ 0.51 0.3795 ⎞ ⎞
X ∼ N 2 ⎜ 0, ⎜ ⎟ ⎟.
⎝ ⎝ 0.3795 0.84 ⎠ ⎠

Therefore, we have σ x21 = 0.51 , σ x22 = 0.84 and the correlation between X 1 and X 2
is ρ x = 0.5798 . Following the notations given in Appendix B, we can calculate the mean
vector and the variance matrix of the conditional distribution Y given X , which are

⎛ 0.9705 x1 + 0.0133 x 2 ⎞ ⎛ 0.0097 0.0005 ⎞

⎜ ⎟ and ⎜ ⎟.
⎝ 0.0534 x1 + 0.9283 x 2 ⎠ ⎝ 0.0005 0.0371 ⎠

Thus we have l1 ( x1 , x 2 ) = 0.9705 x1 + 0.0133 x 2 , l2 ( x1 , x 2 ) = 0.0534 x1 + 0.9283 x 2 ,

Σ11 = 0.0097 , Σ12 = 0.0005 , and Σ 22 = 0.0371 . Using Equation (7), the optimization model
is written as:
1
ETC22 = ( EQL22 + ESC22 + IC )
q

=
1 δ 2 δ1
q
{
∫−δ 2 ∫−δ1 30 ⎣⎡( l1 ( x1 , x 2 ) ) + 0.0097 ⎤⎦ + 25 ⎡⎣( l 2 ( x1 , x 2 ) ) + 0.0371⎤⎦
2 2

80 2
+10 [ l1 ( x1 , x 2 )l2 ( x1 , x 2 ) + 0.0005]} m ( x )dx1dx 2 + (1 − q ) + ,
q q

where q = ∫−δδ2 2 ∫−δδ1 1 m ( x )dx1dx 2 , l1 ( x1 , x 2 ) = 0.9705 x1 + 0.0133 x 2 ,

l2 ( x1 , x 2 ) = 0.0534 x1 + 0.9283 x 2 , 0 ≤ δ1 ≤ 6.0σ x 1 , 0 ≤ δ 2 ≤ 6.0σ x 2 .

140 Feng and Kapur
The function DBLQUAD in Matlab is again used to evaluate the double integrals. The
minimum ETC ∗ we found using Matlab is $40.392 , which is greater than $38.795 , so
that we will not do inspection when the inspection error exists. Whereas it is worthy to point
out that the optimum solutions are δ1∗ = 2.10σ x 1 , δ 2∗ = 1.98σ x 2 when 100% inspection is
preferred. It leads to the optimum specification limits (8.500,11.500) and (18.185, 21.815)
for Y1 and Y2 .

4. Conclusions
As a means of providing protection for both the producer and the customer, 100%
inspection plays an important role for industrial or other decision making processes where
the consequences of excessive deviations for target values are very high. When inspection
error exists due to imperfect measurement systems, the effect of passing a nonconforming
item or rejecting a conforming item can be enormous.
In this paper, we investigated the economic and statistical effects of inspection error on
the design of specifications for both single quality characteristic and bivariate quality
characteristics. For single quality characteristic, we reviewed the case without inspection
error as Model 1, and developed two additional models, Model 2 and Model 3, with
consideration of inspection error and associated inspection cost. Based on the practical
situation (with or without inspection error consideration; constant or variable inspection
cost), one of the three models can be used to make effective decisions for inspection.
For bivariate quality characteristics, we discussed the case without inspection error first,
and then proposed a model for the case with the consideration of inspection error. An
example is used to illustrate the decision-making process for bivariate quality characteristics.
The model for multiple quality characteristics can be developed in a similar manner.

Acknowledgement
The authors wish to acknowledge the helpful comments and suggestions of the referees
whose suggestions on earlier versions of this work have significantly improved this paper.

References
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Problem. Journal of Quality Technology, 19(1), 82-84.
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optimization: a Matlab implementation. NCSU-IE Technical Report, 95-09.
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Control, Innovations in Quality: Concepts and Applications, Detroit, MI.
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Taguchi’s concept of quality loss function. Proceeding of American Society of Mechanical
Engineers, Winter Annual Meeting, Boston, MA.
Economic Design of Specifications for 100% Inspection 141
8. Kapur, K. C. (1988-89). An approach for development of specifications for quality
improvement. Quality Engineering, 1(1), 63-78.
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Quality Engineering, 6(3), 401-417.
10. Kapur, K. C. and Cho, B. R. (1996). Economic design of the specification region for
multiple quality characteristics. IIE Transactions, 28(3), 237-248.
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percent inspection. Journal of Quality Technology, 17(2), 121-127.
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Processes. Asian Productivity Organization, Tokyo.
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NY and American Supplier Institute, MI.
14. Tang, K. and Schneider H. (1987). The effects of inspection error on a complete
inspection Plan. IIE Transactions 19(4), 421-428.
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Quality Technology, 26, 209-226.

Appendix A. Distributions for Bivariate Quality Characteristics

The joint distribution of Y1 , Y2 is a bivariate normal variate, Y ∼ N 2 (0,Σ) , where

⎛ σ 2 σ 12 ⎞
Σ=⎜ 1 ⎟.
⎜σ 2 ⎟
⎝ 12 σ 2 ⎠
The conditional distribution of X 1 , X 2 given Y1 , Y2 is also a bivariate normal variate,
X |Y = y ∼ N 2 ( y,Σ e ) , where y = ( y1 , y2 ), and

⎛ σ 2 σ e12 ⎞
Σe = ⎜ e1 ⎟.
⎜σ 2 ⎟
⎝ e12 σ e 2 ⎠

The marginal distribution of X is obtained by

∞ ∞
m ( x ) = ∫−∞ h ( x , y )dy = ∫−∞ g ( x | y ) f ( y )dy ,

1 ⎡ 1 ⎤ 1 ⎡ 1 ⎤
where f ( y ) = 1/ 2
exp ⎢ − y tΣ −1 y ⎥ , and g ( x | y ) = 1/ 2
exp ⎢ − ( x − y ) t Σ e−1 ( x − y ) ⎥ .
2π | Σ | ⎣ 2 ⎦ 2π | Σ e | ⎣ 2 ⎦

Theorem 1. For any m × n matrixes A and B , we have

(1) ( A + B ) t = A t + B t ,
(2) ( AB ) t = B t A t .
If A and B are n × n square matrixes, and both the inverses exist, we have
(3) ( AB ) −1 = B −1 A −1 .
If A : p × p, B : p × n, C : n × n and D : n × p , and all the inverses exist, then
(4) ( A + BCD ) −1 = A −1 − A −1 B (C −1 + DA −1 B ) −1 DA −1 .
142 Feng and Kapur
Using Theorem 1, we obtain:

( ) ( )
t t
y Σ −1 y + x − y Σ e−1 x − y

( )
t t t t
= y Σ −1 + Σ e−1 y − x Σ e−1 y − y Σ e−1 x + x Σ e−1 x
t
( )
= ⎡ y − Σ −1 + Σ e−1 Σ e−1 x ⎤ Σ −1 + Σ e−1 ⎡ y − Σ −1 + Σ e−1 ( ) ( ) Σ e−1 x ⎤
−1 −1

⎢⎣ ⎥⎦ ⎢⎣ ⎥⎦
t ⎡
+ x ⎢ I − Σ e Σ −1 + I
⎣
((
−1 t ⎤ −1
⎥ Σe x
⎦
) )
t
(
= ⎡ y − Σ −1 + Σ e−1 ) (
Σ e−1 x ⎤ Σ −1 + Σ e−1 ⎡ y − Σ −1 + Σ e−1 ) ( ) Σ e−1 x ⎤
−1 −1

⎣⎢ ⎦⎥ ⎢⎣ ⎦⎥
t
+ x ( Σ + Σe ) x.
−1

The last step is valid due to the fact that Σ and Σ e are symmetric matrixes. Thus the joint
distribution of X and Y is rewritten as

h( x , y ) = g ( x | y ) f ( y )
⎧ 1 t
⎫
exp ⎨− ⎡ y − Σ −1 + Σ e−1 ( ) (
Σ e−1 x ⎤ Σ −1 + Σ e−1 ⎡ y − Σ −1 + Σ e−1 ) ( ) Σ e−1 x ⎤ ⎬
−1 −1

⎢ ⎥⎦ ⎢⎣ ⎥⎦
= ⎩ 2⎣ ⎭
−1 1 / 2
(
2π Σ −1 + Σ e−1 )
×
{
exp − 12 x t ( Σ + Σ e ) x
−1
}.
1/ 2
2π Σ + Σ e

Then the marginal distribution of X is computed as

1 ⎧ 1 −1 ⎫
∞
m ( x ) = ∫−∞ h ( x , y )dy = 1/ 2
exp ⎨− x t ( Σ + Σ e ) x ⎬ ,
2π Σ + Σ e ⎩ 2 ⎭
because the first term in h( x, y ) is a probability density function of a bivariate normal
variable N 2 ((Σ −1 + Σ e−1 ) −1 Σ e−1 x , (Σ −1 + Σ e−1 ) −1 ) .
It means the marginal distribution of X follows a bivariate normal distribution
X ∼ N 2 (0, (Σ + Σ e )) , and the conditional distribution Y given X also follows a bivariate
normal distribution Y | X ∼ N 2 ((Σ −1 + Σ e−1 ) −1 Σ e−1 x , (Σ −1 + Σ e−1 ) −1 ).

Appendix B. Simplification of EQL22

Theorem 2. The marginal distributions derived from multivariate normal distributions are
normal distributions. If Z ∼ N 2 ( µ ,Σ) , and Z = ( Z1 , Z 2 )T , µ = ( µ1 , µ2 )T , and

⎛Σ Σ12 ⎞
Σ = ⎜ 11 ⎟,
⎝ Σ12 Σ 22 ⎠

then (see Anderson [1]) Z1 ∼ N ( µ1 ,Σ11 ) , and Z 2 ∼ N ( µ2 ,Σ 22 ) .

Economic Design of Specifications for 100% Inspection 143
The conditional distribution Y given X follows a bivariate normal distribution,
Y | X ∼ N 2 ((Σ −1 + Σ e−1 ) −1 Σ e−1 x , (Σ −1 + Σ e−1 ) −1 ) . The mean is a 2 × 1 vector (Σ −1 + Σ e−1 ) −1 Σ e−1 x ,
which can be denoted as
⎛ l1 ( x1 , x 2 ) ⎞
⎜ ⎟,
⎝ l 2 ( x1 , x 2 ) ⎠
where l1 ( x1 , x 2 ) and l2 ( x1 , x 2 ) are linear functions of x1 , x2 . The variance of the
conditional distribution Y given X is a 2 × 2 symmetric matrix (Σ −1 + Σ e−1 ) −1 , which
can be written as

⎛ Σ11 Σ12 ⎞
⎜ ⎟.
⎝ Σ12 Σ 22 ⎠

According to Theorem 2, we have Y1 | X 1 , X 2 ~ N (l1 ( x1 , x 2 ),Σ11 ) and Y2 | X1 , X 2 ~

N (l2 ( x1 , x 2 ),Σ 22 ) , where we have

E [Y1 | X1 , X 2 ] = l1 ( x1 , x 2 ) ,
V [Y1 | X 1 , X 2 ] = Σ11 ,
E [Y2 | X1 , X 2 ] = l 2 ( x1 , x 2 ) ,
V [Y1 | X 1 , X 2 ] = Σ 22 ,
cov[Y1 ,Y2 | X1 , X 2 ] = Σ12 .
The above information is used to simplify the expected quality loss EQL22 , which is

EQL22 = ∫−δδ2 2 ∫−δδ1 1 ∫−∞

∞ ∞ 2 2
∫−∞ ( k1 y1 + k12 y1 y2 + k2 y2 ) p ( y | x )dy1dy2 m ( x )dx1dx 2 . (8)

The double integration over y1 and y2 can be separated into three parts and we first
have
∞ ∞ 2
∫−∞ ∫−∞k1 y1 p ( y1 , y2 | x1 , x 2 )dy1dy2
∞ ∞
= ∫−∞ k1 y12 ∫−∞ p ( y1 , y2 | x1 , x 2 )dy2 dy1
∞
= ∫−∞ k1 y12 q ( y1 | x1 , x 2 )dy1

= k1 E [Y12 | X1 , X 2 ]

= k1 ( E [Y1 | X1 , X 2 ]2 + V [Y1 | X1 , X 2 ])

= k1[(l1 ( x1 , x 2 )) 2 + Σ11 ],

where q ( y1 | x1 , x 2 ) is the marginal distribution of y1 given x1 , x2 , and E [Y12 | X1 , X 2 ] is

the expected value of Y12 given X 1 , X 2 . Using the same method, we can get

∫−∞ ∫−∞k2 y2 p ( y1 , y2 | x1 , x 2 ) dy1dy2

∞ ∞ 2

= k2 E ⎡⎣Y22 | X 1 , X 2 ⎤⎦ = k2 ⎡⎢( l 2 ( x1 , x 2 ) ) + Σ 22 ⎤⎥ ,
2

⎣ ⎦
144 Feng and Kapur
and

∫−∞ ∫−∞ k12 y1 y2 p ( y1 , y2 | x1 , x 2 ) dy1dy2 = k12 E [Y1Y2 | X 1 , X 2 ]

∞ ∞

= k12 ( cov [Y1 ,Y2 | X 1 , X 2 ] + E [Y1 | X1 , X 2 ] E [Y2 | X1 , X 2 ]) = k12 ⎡Σ

⎣ 12 + l1 ( x1 , x 2 ) l2 ( x1 , x 2 ) ⎤⎦ .

By plugging (9), (10), (11) into Equation (8), we have

{
EQL22 = ∫−δδ2 2 ∫−δδ1 1 k1 ⎡⎢( l1 ( x1 , x 2 ) ) + Σ11 ⎤⎥ + k2 ⎡⎢( l2 ( x1 , x 2 ) ) + Σ 22 ⎤⎥
⎣
2

⎦ ⎣
2

}
⎣ 12 + l1 ( x1 , x 2 ) l 2 ( x1 , x 2 ) ⎤⎦ m ( x ) dx1dx 2 .
+ k12 ⎡Σ

Authors' Biographies:
Qianmei Feng is an Assistant Professor in the Department of Industrial Engineering at the
University of Houston, TX. Her research interests are quality and reliability engineering,
and applied statistics. She received the Ph.D. degree in Industrial Engineering from the
University of Washington, Seattle, WA in 2005. She is a member of IIE, INFORMS and
Alpha Pi Mu.
Kailash C. Kapur is a Professor, Industrial Engineering, University of Washington, Seattle,
Washington. He was the Director of Industrial Engineering at the University of Washington
from January 1993 to September 1999. He was a Professor and the Director of the School of
Industrial Engineering, University of Oklahoma (Norman, Oklahoma) from 1989-1992 and
a professor in the Department of Industrial and Manufacturing Engineering at Wayne State
University, Detroit, Michigan from 1970-1989. Dr. Kapur has worked with General Motors
Research Laboratories as a senior research engineer and with Ford Motor Company as a
visiting scholar and the U.S. Army, Tank-Automotive Command as a reliability engineer. Dr.
Kapur received the Ph. D. degree (1969) in Industrial Engineering from the University of
California, Berkeley. He has co-authored the book Reliability in Engineering Design, John
Wiley & Sons, 1977. He has written chapters on reliability and quality engineering for
several handbooks such as Industrial Engineering and Mechanical Design. He has published
over sixty papers in technical, research, and professional journals. He received the Allan
Chop Technical Advancement Award from the Reliability Division and the Craig Award
from the Automotive Division of American Society for Quality. He is a Fellow of American
Society for Quality, a Fellow of the Institute of Industrial Engineers, and a registered
professional engineer.