Computers & Industrial Engineering 44 (2003) 633–650

www.elsevier.com/locate/dsw

Integrated production-inventory models for imperfect production

processes under inspection schedulesq
Chen-Sin Lin*, Chih-Hua Chen, Dennis E. Kroll
Department of Industrial and Manufacturing Engineering and Technology, Bradley University, Peoria, IL 61625, USA

Abstract
This paper deals with inventory models that unify the inventory problems of raw materials and finished products
for a single product imperfect manufacturing system. The product is manufactured in batches, and raw materials
are jointly replenished from outside suppliers. The system is assumed to deteriorate during the production process.
As a result, some proportion of defective items is produced. The defective items are reworked at some cost either
before or after a sale. Periodic inspections at equally spaced times and restorations of the production process are
used to operate the system. The objective is to minimize the expected total cost for the system. A solution
procedure is developed to find a near optimal solution for the basic model. The analysis is extended to various
cases where the defect rate is a function of the setup cost, the proportion of defective items is not constant, or the
inventory system has a limited capacity for raw materials.
q 2002 Elsevier Science Ltd. All rights reserved.
Keywords: Inventory; Production; Maintenance

1. Introduction

The economic production quantity (EPQ) model is a useful inventory control model that is
widely accepted in industry (Osteryound, McCarty, & Reinhart, 1988). This model determines the
optimal lot size for a production run of an item on a single facility. It has been analyzed under
various conditions. Traditional approaches are based on the assumption that a production
process always produces items of perfect quality. Product quality, however, is not always
perfect and actually depends on the state of the production process, which may shift from an “in-
control” state to an “out-of-control” state and produce defective items (Rosenblatt & Lee, 1986).
When the production process was in an “in-control” state, items produced maybe of

q
Processed by Area Editor Elsayed A. Elsayed
* Corresponding author.

0360-8352/03/$ - see front matter q 2002 Elsevier Science Ltd. All rights reserved.
PII: S 0 3 6 0 - 8 3 5 2 ( 0 2 ) 0 0 2 3 9 - 5
634 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

high or of perfect quality. As time goes on, the process may deteriorate and produce some
defective items.
Over the years, an abundance of research has attempted to solve the system for an imperfect
production process in some way or other (Lee & Rosenblatt, 1987; Valdez-Flores & Feldman, 1989).
The majority of this research on EPQ models does not take into account the fact that raw materials are
usually consumed during a production run. Further, the consumption rates for raw materials are often not
uniform as usually assumed. Since raw materials are integral parts of the entire production system,
decisions regarding the order quantities for raw materials should be made simultaneously
with determination of production quantity. This would optimize the system of goods and not just
each good in turn.
Goyal (1997) proposed an integrated EPQ model that includes the decision of optimal ordering
policy for raw materials required for manufacturing the product. This model assumed that items
produced from the facility are of perfect quality. Furthermore, the model assumed that raw
materials are jointly replenished and that there is a large enough storage space to hold them. Yet,
in practice there is often a limitation on available storage space or a fixed budget on investment for
raw materials. Perfect quality is rarely achieved.
Lee and Park (1991) extended the imperfect production process on the EPQ model with two kinds of
cost: reworking cost and warranty cost. During the production run the process is assumed to deteriorate,
so defective items are produced and sold. The defective products are reworked at some cost before being
shipped, or if passed to the customer, incur a much larger warranty cost. This work did not include the
decision of the order quantities for raw materials.
Lin (1999) analyzed the integrated EPQ models with imperfect production processes and a
limited capacity for raw materials. While this paper addresses the problems of determining
economic production quantities with imperfect production processes and economic order quantities
for raw materials with a limited capacity, it did not consider the inspection schedules during a
production run. Also, all defective items are reworked at the same cost.
In a joint replenishment inventory system, the problem is how to determine the economic
ordering frequency for individual items. It may be economical to order certain items less frequent
than others. Also, for a system subject to random failures, loss due to reworking costs can be
partially avoided by making frequent inspections. To minimize the expected total cost due to raw
materials and imperfect production processes, the ordering frequency for raw materials and the
inspection times for production process must be determined concurrently.
Motivated by the deficiencies of previous models, this paper examines integrated EPQ models
for a single product system with imperfect production processes under inspection schedules. An
algorithm is developed for finding a near optimal production lot size of the product, inspection
schedules, and the corresponding order quantities of raw materials. Periodic inspections with
equally spaced inspection times are adopted so that any defective part can be detected and replaced
when the process is out of control.
This paper is organized as follows. Section 2 presents the notations and assumptions. Then the
basic model for imperfect production processes under inspections is formulated. In later sections
the basic model is extended to four cases where the defective rate is a function of the setup cost,
the production system is deteriorating linearly or exponentially, and the inventory system
has a limited capacity for raw materials. Numerical examples are provided to demonstrate the
cost effects.
 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650 635

2. Notations and assumptions

The notation adopted for the development of the mathematical model is given as follows:

D demand rate in units per year.

P production rate in units per year (P . D).
T cycle time for each production lot (measured in years), where TD ¼ tP:
t production run time for each production lot (measured in years).
tp optimal production run time for each production lot.
S setup cost for a production run of the product.
h holding cost per unit per year of the product.
ti elapsed time of a shift from the in-control to the out-of-control state since ti.
a percentage of defective items produced once the system is in the out-of-control state.
m number of different raw materials.
Dj demand rate of raw material j.
Sj setup cost of placing a purchase order of raw material j.
hj unit holding cost of raw material j.
Qj economic order quantity of raw material j.
Rj ðt; Kj Þ annual variable cost of raw material j.
Kj a positive integer, Kj $ 1.
K a vector of Kj, K ¼ ðK1 ; K2 ; …; Km Þ:
n number of inspections undertaken during each production run (n $ 1).
v cost of inspecting the production process.
r cost of restoring the production process.
Sw cost incurred by selling a defective item (i.e. warranty cost).
Sr cost incurred by reworking an unsold defective item, where Sw . Sr.
ti elapsed time from the beginning of the production run until the ith inspection takes place,
i ¼ 1,2,…,n.
tn t to ensure the process is in control at the beginning of each production cycle.
Ni number of defective items produced in (ti, tiþ1), i ¼ 0,…,n 2 1; ðNi ¼ Nw þ Nr Þ:
Nw number of defective items sold per cycle.
Nr number of defective items reworked before sale per cycle.
wi storage requirement per unit of raw material j.
U available storage space or the fixed budget for raw materials.
TCðt; n; KÞ the expected annual total cost for the single product system and raw materials.

The following assumptions are required for the development of the model:

1. Demand rate of the finished product is known and constant.

2. Production rate of the finished product is known and constant.
3. The unit holding cost for the raw materials and the finished product is known and constant.
4. The setup cost for the raw materials and the finished product is known and constant.
5. The cost of producing a defective finished product is known and constant.
6. All of the incoming raw materials are of perfect quality.
636 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

7. Lead time for procuring raw materials is negligible.

8. No shortage of raw materials or finished product is allowed.
9. The percentage of defective items produced during the “in-control” state is negligible.
10. Inspections occur at evenly spaced times.
11. The cost of inspection and restoration is constant.
12. Inspection and restoration times of the process are negligible, and inspection is perfect.
13. The production-inventory system is operated under FIFO policy.

3. Development of the basic model

Consider the production of a single product produced in batches on a single facility or production
process. It is assumed that at the beginning of each production run the production process is in an “in-
control” state and producing items that conform to the specification. After a period of time, the production
process deteriorates. As a result, the process shifts from the in-control state to the out-of-control state in
which a certain percentage of items produced are non-conforming. This approach appears commonly in
the literature of quality control (Lee & Park, 1991; Lee & Rosenblatt, 1987; Montgomery, 1996).
In this paper, the work of Lee and Park (1991) was reformulated to consider the imperfect production
process and the raw materials which are required for each production run. After the process is shifted
from the in-control state to the out-of-control state, the state change will be discovered by inspection and
followed by some restorative work. The inspection and restoration times are assumed to be negligible.
Although this assumption can be relaxed, it is quite plausible, given the current advances in the
technologies used for inspection. Moreover, the use of modular designs in complex production systems
enables speedy repair of failed machines and restorations.
The models are generalized to consider the case where the shift of the production process can be
detected and corrected during a production run. The elapsed time until the process shifts, ti, is a random
variable and assumed to have an exponential distribution with mean 1/m. It is assumed that the
percentage of detectives, a, is a constant throughout the duration when the production process is in an
out-of-control state. Furthermore, the defect rate, a, is assumed to be independent of the setup cost.
These assumptions will be relaxed in latter sections.
Some preliminary results are given below. We omit the detailed derivation here since they are
provided in Lee and Park (1991). The total expected values of EðNw Þ and EðNr Þ in a production run can
be obtained as follows:
" #
21  
1 nX
21
2mðti21 2ti Þ n nX
D 1 2mðti21 ðD=PÞ2ti Þ 1
EðNr Þ ¼ Pa t þ e 2 2 aP tiþ1 2 ti þ e 2 I ð1Þ
m i¼0 m i¼0
P m m i
21 
nX 
D 1 2mðti21 ðD=PÞ2ti Þ 1
EðNw Þ ¼ Pa tiþ1 2 ti þ e 2 I ð2Þ
i¼0
P m m i

where the indicator variable Ii is defined as: Ii ¼ 1 if ðP 2 DÞtiþ1 , Pðtiþ1 2 ti Þ; Otherwise, Ii ¼ 0:

The expected cost incurred by defective items is:
D
½S EðNw Þ þ Sr EðNr Þ ð3Þ
tP w
 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650 637

The setup cost and inventory holding cost are:

SD hðP 2 DÞt
þ ð4Þ
tP 2
As derived by Lee and Rosenblatt (1987), the cost related to the inspection and restoration of the
production process is:
( )
D X
n21
2mðti21 2ti Þ
nv þ r ð1 2 e Þ ð5Þ
tP i¼0

Hence, the total annual cost for the production process, denoted as Fðt; n; t1 ; t2 ; …; tn Þ; can be expressed
as following:
" #
SD hðP 2 DÞt D X
n21
2mðti21 2ti Þ
Fðt; n; t1 ; t2 ; …; tn Þ ¼ þ þ nv þ r ð1 2 e Þ
tP 2 tP i¼0
" #
D 1 nX
21
2mðti21 2ti Þ n D
þ Sr aP t þ e 2 þ ðS 2 Sr ÞaP ð6Þ
tP m i¼0 m tP w
X
n21
D 1 2mðti21 ðD=PÞ2ti Þ 1

£ tiþ1 2 ti þ e 2 I
i¼0
P m m i

Since raw materials are jointly replenished, they have an identical order cycle time T. These raw materials
are managed following the fundamental economic order quantity (EOQ) model. This implies that the order
quantity for raw material j is Qj ¼ Kj Dj T ¼ Kj Dj Pt=D: The total annual cost for jth raw material, denoted
as Rj ðt; Kj Þ; includes the ordering cost and the holding cost. It can be expressed as following:
DSj tDj tP
Rj ðt; Kj Þ ¼ þ hj þ D ðK 2 1Þhj : ð7Þ
tPKj 2 2D j j

At a given t, Rj ðt; Kj Þ can be minimized by choosing Kj such that Rj ðt; Kj Þ # min{Rj ½t; ðKj þ
1Þ; Rj ½t; ðKj 2 1Þ}: This condition yields the following inequality:

1 t2 P2 Dj hj 1
# # ð8Þ
Kj ðKj þ 1Þ 2D2 Sj Kj ðKj 2 1Þ

Inequality (8) can be rewritten as:

1 1 P2 Dj hj
# t2 tj2 # ; where tj2 ¼ ð9Þ
Kj ðKj þ 1Þ Kj ðKj 2 1Þ 2D2 Sj

The overall annual cost for all the raw materials required for the production system with a production run
time t is given by:
X m  
m
D X m
Sj t X P
Rj ðt; Kj Þ ¼ þ Dj þ Dj ðKj 2 1Þ hj ð10Þ
j¼1
tP j¼1 Kj 2 j¼1 D
638 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

Now, the expected annual total cost TCðt; n; KÞ is obtained in the following:
m  
D X m
Sj t X P SD hðP 2 DÞt
TCðt; n; KÞ ¼ þ Dj þ Dj ðKj 2 1Þ hj þ þ
tP j¼1 Kj 2 j¼1 D tP 2
( ) " #
nX
D 21
2mðti21 2ti Þ D 1 nX
21
2mðti21 2ti Þ n
þ nv þ r ½1 2 e  þ S aP t þ e 2
tP i¼0
tP r m i¼0 m
X
n21  
D D 1 1
þ ðSw 2 Sr ÞaP tiþ1 2 ti þ e2mðti21 ðD=PÞ2ti Þ 2 I
tP i¼0
P m m i
ð11Þ

Consider the (i þ 1)th subinterval (ti ; tiþ1 ), i ¼ 0; 1; 2; …; n 2 1: Since tiþ1 ¼ ði þ 1Þt=n and tiþ1
2ti ¼ t=n; the amount of on-hand inventory at time t is ðP 2 DÞði þ 1Þt=n and the number of items
produced in this interval is Pt=n: Here, if we define c is as the smallest integer that satisfies the
relationship: ðP 2 DÞði þ 1Þt=n $ Pt=n; then c ¼ dP=ðP 2 DÞ 2 1e; where dxe denotes the smallest
integer that is greater than or equal to x.
The value of the indicator variable is associated with the relative size of n and c. Therefore,
in formulating the expected annual variable cost, we need to consider the two cases
given below separately according to the value of n. Note that the variable b is
employed below so that only one expression of the expected annual variable cost is needed for
both cases.

(i) Case 1, n # c :

Ii ¼ 1; i ¼ 0; 1; 2; …; n 2 1; b¼n

(ii) Case 2, n . c :
(
1; i ¼ 0; 1; 2; …; c 2 1
Ii ¼ b¼c
0; i ¼ c; c þ 1; …; n 2 1

In most cases, it is reasonable to use the Maclaurin series approximation: expð2mtÞ ¼ ^ 1 2 mt þ ðmtÞ2 =2!·
for any exponential terms in Eq. (11) since mt is usually very small. With this approximation, we obtain
m  
D X m
Sj t X P ðS þ nvÞD hðP 2 DÞt
TCðt; n; KÞ ¼ þ Dj þ Dj ðKj 2 1Þ hj þ þ
tP j¼1 Kj 2 j¼1 D tP 2

 
mD mt t ð12Þ
þ r 12 þ aP 2 ½ðSw 2 Sr Þb þ Sr n
P 2n 2n
 
aDmtðP 2 DÞ ðP 2 DÞ
þ ðSw 2 Sr Þbðb þ 1Þ ð2b þ 1Þ 2 1
2Pn2 6P
 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650 639

Given n and K, if we differentiate TCðt; n; KÞ with respect to t and set the derivative at zero, we can
obtain the following expression for t which minimizes the expected annual variable cost:

2 31=2
DX m
Sj D
6 P þ ðS þ nvÞ 7
6 j¼1
Kj P 7
tðn; KÞ ¼ 6
6
7
7 ð13Þ
4 X 5

where

m  

1X P hðP 2 DÞ mD rm aP
X¼ Dj þ Dj ðKj 2 1Þ hj þ þ 2 þ 2 ½ðSw 2 Sr Þb þ Sr n
2 j¼1 D 2 P 2n 2n
 
aDmðP 2 DÞ ðP 2 DÞ
þ ðS w 2 Sr Þbðb þ 1Þ ð2b þ 1Þ 2 1
2Pn2 6P

Based on the above derivations, the algorithm presented below is developed for this model. Note that this
procedure employs a stepwise partial enumeration approach to find the optimal n.

Algorithm 1. The determining of the optimal values of t p, K p, and n p

Step 1. Calculate c. Set k ¼ 0.

Step 2. Let n ¼ 1 þ k: If n # c; set b ¼ n; otherwise, set b ¼ c:
Step 3. Set Kjð0Þ ¼ 1 for all the raw materials and obtain the first trial value of t (0). Let i ¼ 1.
Step 4. Obtain KjðiÞ ¼ Kjði21Þ for each raw material by applying the following condition: Rj ½t; Kj  #
min{Rj ½t; ðKj þ 1Þ; Rj ½t; ðKj 2 1Þ}:
Step 5. Compute tðiÞ by substituting KjðiÞ in the above equation. If ltðiÞ 2 tði21Þ l # d; or lK ðiÞ 2 K ði21Þ l ¼
0; go to step 6. Otherwise, set i ¼ i þ 1 and return to step 4.
Step 6. A local optimal order time for each raw material and a corresponding total cost are reached
according to the current value of n. Increase k by 1 and return to step 2 until the minimum total cost is
found.

In comparing the EPQ, Pt p, with the conventional EPQ as described in Johnson and Montgomery
(1974), clearly the optimal production quantity for an imperfect production system is smaller than that
for a system with no defective items. By considering the impact of defective items, a shorter production
run time is implied. As expected, Eq. (13) shows that the higher the number of raw materials or the
warranty cost, the shorter the production run should be. However, when the number of inspections goes
up, the economic production run gets longer. Thus, despite the fact that the existence of defective items
in production would tend to result in a smaller lot size, the use of inspection schedules may enable the
production of larger lot sizes. The optimal lot size is given by Qp ¼ Ptp and the optimal order quantity
for raw material j is given by Qpj ¼ Dj Kj Ptp =D:
640 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

4. Model with deterioration parameters as a function of setup costs

The previous model assumed that the mean elapsed time until the occurrence of process deterioration
1/m and the percentage a of nonconforming items produced during the out-of-control period are
independent of the setup cost. However, different levels of investment in production setups will affect
the values of m and a. In this section we consider a case where m and a are functions of the production
setup cost.
Since additional expenditure on the setup may increase the value of 1/m and decrease the value a, it
was assumed that am ¼ gðSÞ; where g is a convex decreasing function. Our objective for the problem is
to find the optimal values of t p, n p, Kpj , and S p such that TCðt; n; K; SÞ is minimized. Replacing am in Eq.
(13) by gðSÞ; the conditions yield the following expressions for finding t p:
2 31=2
DX m
Sj D
6 P þ ðS þ nvÞ 7
6 j¼1
Kj P 7
p 6
t ðn; K; SÞ ¼ 6 7 ð14Þ
7
4 Y 5

where
m  

1X P hðP 2 DÞ D 2 gðSÞP
Y¼ D þ D ðK 2 1Þ hj þ 2r m þ ½ðSw 2 Sr Þb þ Sr n
2 j¼1 j D j j 2 2Pn n
 
gðSÞDðP 2 DÞ ðP 2 DÞ
þ ðSw 2 Sr Þbðb þ 1Þ ð2b þ 1Þ 2 1
2Pn2 6P

Substituting Eq. (14) into Eq. (12), we obtain:

2
0 131=2
D X
m
S mDr
TCðn; K; SÞ ¼ 24Y @ þ S þ nvA5 þ
j
ð15Þ
P j¼1 Kj P

To find the S p that minimizing TCðn; K; SÞ; it is sufficient to consider the S p that minimizes:
0 1
Xm
S
FðSÞ ¼ Y @ þ S þ nvA
j

j¼1
K j

Differentiating FðSÞ with respect to S and setting the derivative to zero, yields:
2 3
6 7
21 6
6 Y 7
7
g0 ðSÞ ¼ 6 7 ð16Þ
Z 4 X Sj
m
5
þ ðS þ nvÞ
j¼1
K j
 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650 641

where
 
D DðP 2 DÞ ðP 2 DÞ
Z ¼ 2 ½ðSw 2 Sr Þb þ Sr nÞ þ ðSw 2 Sr Þbðb þ 1Þ ð2b þ 1Þ 2 1
2n 2Pn2 6P
Suppose the function gðSÞ is specified, for example, as gðSÞ ¼ uS2g (Rosenblatt & Lee, 1986),
where u . 0 and g . 0. Then g0 ðSÞ ¼ 2guS2g21 : After some algebra, a solution for S can be
derived and rewritten as a power equation S2g þ AS2g21 2 B ¼ 0; where A and B are positive and
given as follows:
0 1
X m 
1X
m
S P hðP 2 DÞ D
g@ þ nvA
j
Dj þ Dj ðKj 2 1Þ hj þ þ 2 r m2 Þ
j¼1
K j 2 j¼1 D 2 2Pn
A¼ ; B¼
g21 uðg 2 1ÞZ
Let f ðSÞ ¼ S2g þ AS2g21 !B and define S1 ¼ ðB=AÞ1=ð2g21Þ : It is easy to see that f ð0Þ ¼ 2B , 0 and
g
f ðS1 Þ ¼ S2
1 . 0: Hence, there exists a root in the interval [0,S1]. This root can be found through a
numerical approach such as the bisection method or the Newton– Raphson method. Given a value
n, Eqs. (14) and (16) can first be used to find t and S, then in turn find the Kj value that gives a
local minimum. A partial enumeration can be used to find the optimal n value. The algorithm for
finding a solution for this model is given below.

Algorithm 2. The determining of the optimal values of S p, t p, K p, and n p

Step 1. Calculate c. Set k ¼ 0:

Step 2. Let n ¼ 1 þ k: If n # c; set b ¼ n; otherwise, set b ¼ c:
Step 3. Set Kjð0Þ ¼ 1 for all the raw materials and obtain the first trial value of S (0) and t (0). Let i ¼ 1:
Step 4. Obtain KjðiÞ ¼ Kjði21Þ for each raw material by applying the following condition: Rj ½t; Kj  #
min{Rj ½t; ðKj þ 1Þ; Rj ½t; ðKj 2 1Þ}:
Step 5. Compute tðiÞ and SðiÞ by substituting KjðiÞ in Eqs. (14) and (16). If ltðiÞ 2 tði21Þ l # d1 ; or
lK ðiÞ 2 K ði21Þ l ¼ 0; go to step 6. Otherwise, set i ¼ i þ 1 and return to step 4.
Step 6. A local optimal order time for each raw material and a corresponding total cost are
reached according to the value of n. Increase k by 1 and return to step 2 until the minimum total
cost is found.

5. Models with linear and exponential deterioration

In the development of the basic model, it is assumed that once the production process is out of control,
the percentage of defective items produced (a) remains constant throughout the entire cycle. However,
this assumption may not be realistic. It is conceivable that as the production system deteriorates over
time, the percentage of defective items produced may increase accordingly. In this section, the basic
model is extended to incorporate two dynamic cases: (i) the production system deteriorates linearly after
the system is in the out-of-control state, and (ii) the production system deteriorates exponentially after
the process is in the out-of-control state.
642 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

5.1. Case I: the linearly deteriorating model

When the process is in the out-of-control state, the percentage of defective items produced is assumed
to be a linear function a þ bxi ; where xi . ti; a . 0, and b . 0. Under this assumption, the expected
number of defective items produced during a production period is given by:
ðtiþ1 2ti  ðtiþ1 2ti 2ti
EðNi Þ ¼ P aðtiþ1 2 ti 2 ti Þ þ bxi dxi m e2mti dti
0 0

1 2mðtiþ1 2ti Þ 1
¼ aP tiþ1 2 ti þ e 2
m m

 2 
1 1
þ bP ðtiþ1 2 ti Þ2 2 ½1 2 mðtiþ1 2 ti Þ 2 e2mðtiþ1 2ti Þ  ð17Þ
2 m

Assuming mt is small, the Maclaurin series approximation expð2mtÞ ¼ ^ 1 2 mt þ ðmtÞ2 =2! can be used
again to obtain the values of defective items of EðNw Þ and EðNr Þ which are the same as in the basic
model. Consequently, the objective function TCðt; n; KÞ is reduced to Eq. (15). Hence, the formulation
for this case is identical to that of the basic model. This is a useful result when it is difficult to estimate
the coefficient b. However, suppose b is not negligible. Then the Maclaurin series can still be used to
approximate expð2mtÞ by carrying additional terms in the approximation. After ignoring those terms
with second or higher orders of mt, the total annual cost can be derived as following:
m  
D X m
Sj t X P ðS þ nvÞD hðP 2 DÞt
TCðt; n; KÞ ¼ þ Dj þ Dj ðKj 2 1Þ hj þ þ
tP j¼1 Kj 2 j¼1 D tP 2
( ! )
mD mt aPt bPt2
þ £ r 12 þ þ ½ðSw 2 Sr Þb þ Sr n
P 2n 2n2 6n3

 
DmðP 2 DÞ ðP 2 DÞ
þ ðSw 2 Sr Þbðb þ 1Þ £ at ð2b þ 1Þ 2 1
2Pn2 6P
"  #)
bt2 ðP 2 DÞð2n þ 1Þ P 2 D 2 nðn þ 1Þ 3
þ 2 2 ð18Þ
3n 2P P 4 2

Given n and k, we can solve the equation dTCðt; n; KÞ=dt ¼ 0 to find t that minimizes TCðt; n; KÞ: After
some algebra, the equation can be rewritten as a cubic equation At3 þ Bt2 2 C ¼ 0; where A, B, and C
are positive and given as follows:

bmD bDmðP 2 DÞ
A¼ 3
½ðSw 2 Sr Þb þ Sr n þ ðSw 2 Sr Þbðb þ 1Þ
6n 6Pn3
"  #
ðP 2 DÞð2n þ 1Þ P 2 D 2 nðn þ 1Þ 3
 2 2
2P P 4 2
 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650 643

m   
1X P hðP 2 DÞ mD 2rm aP
B¼ D þ D ðK 2 1Þ hj þ þ þ 2 ½ðSw 2 Sr Þb þ Sr n
2 j¼1 j D j j 2 P 2n 2n
 
aDmðP 2 DÞ ðP 2 DÞ
þ ðSw 2 Sr Þbðb þ 1Þ ð2b þ 1Þ 2 1
2Pn2 6P
0 1
D @Xm
Sj
C¼ þ ðS þ nvÞA
P j¼1 Kj

Let f ðtÞ ¼ t3 þ ðB=AÞt2 2 ðC=AÞ and define t0 ¼ ðC=BÞ1=2 : Note that t 0 is identical to that in Eq. (13).
Further, since f ð0Þ ¼ 2ðC=AÞ , 0 and f 0 ðtÞ ¼ ðC=BÞ3 . 0 there exists a root in the interval [0,t0 ]. This root
can be found by the bisection method or the Newton– Raphson method. Given n and K values, Eq. (18) can
first be used to find t, then in turn find the Kj value. Hence, an algorithm similar to Algorithm 1 can be
developed for this model.

5.2. Case II: the exponentially deteriorating model

In this case, after the process is in the out-of-control state, the percentage of defective items produced
is assumed to be given by a þ d½1 2 expð2bxi Þ; where a, b, d and xi are nonnegative. Under this
assumption, the expected number of defective items produced during a production period is given by:
ðtiþ1 2ti  ðtiþ1 2ti 2ti 
2bxi
EðNi Þ ¼ P aðtiþ1 2 ti 2 ti Þ þ dð1 2 e Þdxi m e2mti dti
0 0
  
1 2mðtiþ1 2ti Þ 1 2mðtiþ1 2ti Þ 1 1
¼ aP tiþ1 2 ti þ e 2 þ dPðtiþ1 2 ti Þ 2 dPð1 2 e Þ þ
m m b m
 
dmP
2 ðe2bðtiþ1 2ti Þ 2 e2mðtiþ1 2ti Þ Þ ð19Þ
bðb 2 mÞ
When both b and m are small, the Maclaurin series approximation for expð2bðtiþ1 2 ti ÞÞ and
expð2mðtiþ1 2 ti ÞÞ can be used again to obtain the value of EðNi Þ which is reduced to that of the basic
model and the optimal t p is again given the same as in the basic model. Hence, the procedure given in
Algorithm 1 can be used to obtain the optimal solutions of t p and Kjp for this model.

6. Model with a limited capacity for raw materials

It is assumed that raw materials are required for each production run. There is a constraint on the
availability of the resource because of limited storage space or a limited budget for inventory
holding. Now the model can be formulated as a constrained optimization problem, denoted as
the problem P, in the following:
X
m
ðPÞ minimize TCðt; n; KÞ ¼ Fðt; nÞ þ Rj ðt; Kj Þ ð20Þ
j¼1
644 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

Pt X
m
subject to wDK #U ð21Þ
D j¼1 j j j

t$0 ð22Þ

Kj $ 0 j ¼ 1; 2; …; m: ð23Þ

In the above formulation Kj is treated as a continuous variable so that TCðt; n; KÞ becomes differentiable
with respect to Kj : Once the optimal value for Kj is obtained, we evaluate and compare Rj ðt; Kj Þ for the two
integer values nearest to Kj : The integer that yields a lower Rj ðt; Kj Þ value is the optimal solution.
Due to the presence of a single resource constraint and the convexity of the objective function, the
solution to this problem generally involves the use of a Lagrange multiplier. Johnson and Montgomery
(1974) presented marginal cost solution based on the differentiability of the Lagrangian function. To solve
the problem, the region is defined as R ¼ {ðt; K1 ; …; Km Þ :t $ 0; Kj $ 0; j ¼ 1; …; m}: While treating n as
a constant, we can show that the partial derivatives ›2 TCðt; n; KÞ=›t2 . 0; ›2 TCðt; n; KÞ=›t›Kj ¼ 0 ¼ j;
›2 TCðt; n; KÞ=›2 Kj2 . 0; and ›2 TCðt; n; KÞ=›Ki ›Kj ¼ 0 for every point in R. This implies that the Hessian
matrix of the function TCðt; n; KÞ is positive semidefinite in R. Hence, the function TCðt; n; KÞ is convex.
Inequality (21) is used to modelP the constraint on the availability of the resource. Define gi ðt; KÞ; i ¼
1; 2; 3; as g1 ðt; KÞ ¼ ðPt=DÞ wj Dj Kj 2 U; g2 ðt; KÞ ¼ 2t; and g3 ðt; KÞ ¼ 2Kj : It can be shown that these
functions are convex since their Hessian matrices are positive semidefinite everywhere in the region R.
Hence, the necessary and sufficient conditions for the optimality of problem P are given by the Karush–
Kuhn– Tucker (KKT) conditions (Bazaraa, Sherali, & Shetty, 1993). In this conditions let l and u be the
Lagrange multipliers for constraints (21) and (22), respectively. Also let gj be the Lagrange multiplier for
the jth constraint in Eq. (23). Then, for a given n, the Lagrangian function can be written as follows:
0 1
Xm
Pt X
m Xm
Lðt; Kj ; l; u; gÞ ¼ Fðt; nÞ þ Rj ðt; Kj Þ þ l@ wj Dj Kj 2 U A 2 ut 2 gj Kj ð24Þ
j¼1
D j¼1 j¼1

where l, u, and gj are nonnegative.

Since the nature of the problem will ensure that the optimal values for t p and Kjp are positive for each
j, it follows that u ¼ 0 and gj ¼ 0 for all j. This simplifies the Lagrangian function. Consequently, the
KKT conditions yield the following equations:
m  
›Lðt; Kj ; lÞ 1X P hðP 2 DÞ mD
¼ Dj þ Dj ðKj 2 1Þ hj þ þ
›t 2 j¼1 D 2 P


rm aP aDmðP 2 DÞ
 2 þ 2 ½ðSw 2 Sr Þb þ Sr n þ ðSw 2 Sr Þbðb þ 1Þ
2n 2n 2Pn2
0 1
 
ðP 2 DÞ D @X m
Sj lP Xm
 ð2b þ 1Þ 2 1 2 2 þ S þ nvA þ wDK
6P Pt j¼1 Kj D j¼1 j j j

¼0 ð25Þ
 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650 645

›Lðt; Kj ; lÞ 2DSj tP ltP

¼ þ Dj hj þ w D ¼ 0; j ¼ 1; 2; …; m; ð26Þ
›Kj 2
tPKj 2D D j j
0 1
tP Xm
l@ w D K 2 U A ¼ 0; ð27Þ
D j¼1 j j j

l $ 0: ð28Þ
For l . 0, the solution for t p and Kjp are derived from Eqs. (25) and (26) as follows:
2 31=2
DX m
Sj D
6 þ ðS þ nvÞ 7
6 P j¼1 Kj P 7
6 7
tp ¼ 6 X 7 ð29Þ
6 m 7
4 X þ lP wj Dj Kj 5
D j¼1
" #1=2
p D 2Sj
Kj ¼ ð30Þ
tP Dj hj þ 2lwj Dj
where X is as in Eq. (13). Given a l value, we can find t p and Kjp by Pusing Algorithm 1.
p
If the optimal multiplier l is positive, Eq. (27) implies that ðtP=DÞ m
j¼1 wj Dj Kj ¼ U: This result can
be used to develop an approach to find the optimal multiplier. Assuming h1 =w1 ¼ h2 =w2 ¼ · · · ¼ hm =wm ;
a direct solution for l p can be obtained as follows:
82 m 32 9
> X >
>
> 1=2
ð2wj Dj Sj Þ 7 >
>
>
< 6 >
=
1 6 j¼1 7 h
p
l ¼ 6 7 2 1
ð31Þ
2> 6 7 w >
>
> 4 U 5 1>>
>
: >
;

When the factors hj =wj are not equal for all j, a procedure developed in Ventura and Klein (1988) is
adopted for finding l p. The procedure is only briefly described without providing all the details.
Assuming raw materials are numbered in an order such that h1 =w1 # h2 =w2 # · · · # hm =wm ; the initial
lower and upper bounds are defined as follows:
82 m 32 9
> X >
>
> 1=2
ð2wj Dj Sj Þ 7 >
>
>
< 6 >
=
1 6 6 j¼1 7
7 hm
lL ¼ 6 2
7 w > ð32Þ
2>> 4 U 5 m>
>
> >
>
: ;
82 m 32 9
> X >
>
> 1=2
ð2wj Dj Sj Þ 7 >
>
>6
< >
=
6
1 6 j¼1 7 h
lU ¼ 72 1
ð33Þ
2>6 7 w >
>
>4 U 5 1>
>
>
: >
;
646 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

2w2j Dj Sj
fj ðlÞ ¼ 8 92 2 2wj l; j ¼ 1; 2; …; m ð34Þ
< Xi  2Di Si 1=2 =
mw
U2
: i_j hi þ 2lwi ;

The gradient is given by

8 921
> " #1=2 >
>
> Xm
2Dj Sj >
>
>
> 24w 2
D S w2 >
>
>
< 1 1 1 j
ðh þ 2 l w Þ3 >
=
j¼2 j j
›g1 ðhÞ ¼ ½›f1 ðlÞ21 ¼ 2 !1=2 33 2 2w ð35Þ
>
> X m
1
>
>
>
> 4U 2 2D j Sj 5 >
>
>
> wj >
>
: j¼2
h j þ 2 l w j ;

Algorithm 3. The determining of the optimal value of l p

Step 0: Obtain l(0) (0)

L and lU from Eqs. (32) and (33), respectively. Compute h
ð0Þ
¼ f1 ðlð0Þ
L Þ from
Eq. (33), Let i ¼ 0:
Step 1: Using Eq. (35), compute

lðiþ1Þ
L ¼ lðiÞ ðiÞ ðiÞ
L þ ›g1 ðh Þ½h1 2 h 

Step 2: Using Eq. (34), compute

ðlðiÞ
U 2 lL
ðiþ1Þ
Þ½f1 ðlðiþ1Þ Þ 2 h1 
lðiþ1Þ
U ¼ lðiþ1Þ
L þ ðiþ1Þ
L
ðiÞ
½f1 ðlL Þ 2 f1 ðlU Þ

Step 3: If ðlðiþ1Þ
U !lðiþ1Þ
L Þ=lLðiþ1Þ # 1 (1 is a small tolerance), then set lp ¼ ðlðiþ1Þ
U 2 lðiþ1Þ
L Þ=2; stop.
ðiþ1Þ ðiþ1Þ
Otherwise, set h ¼ f1 ðlL Þ and i ¼ i þ 1: Return to Step 1.

In summary, to find a solution for this model, it can be assumed l p ¼ 0 and Algorithm 1 can be used
to find t p and Kjp : If constraint (21) is satisfied, the current t p and Kjp values are optimal. Otherwise, since
l p must be positive, the procedure of Algorithm 3 can be used to find l p. After obtaining l p, Algorithm
1 can again be employed to find t p and Kjp :

7. Numerical examples

To illustrate the models developed in this paper, the following examples are considered with the
relevant data given in Tables 1 and 2.
 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650 647

Table 1
Parameter values for numerical examples

Parameters Dimensions Value

D (units/year) 600
P (units/year) 1000
S ($) 100
h ($/unit/year) 0.8
Sw ($/unit) 10
Sr ($/unit) 2
v ($) 10
r ($) 10
a 0.7
m 0.2

7.1. The basic model

The proposed Algorithm 1 is used to generate the result of the basic model shown in Table 3. The
optimal solutions of the basic model are tp ¼ 0:289; np ¼ 2; and K ¼ [1,1,1,1,1,2,1,1,1,3]. The expected
annual total cost is $800.41. The economic ordering frequencies are 3, 3, 3, 3, 3, 2, 3, 3, 3, 1 for raw
materials j ¼ 1; 2; …; 10; respectively.

7.2. The model with deteriorating parameters as a function of setup costs

Suppose that, once the process is in the out-of-control state, the proportion of defective items
produced are independent of the setup cost and the function is given as am ¼ gðSÞ ¼ uS2g ; where
u ¼ 100 and g ¼ 2. Due to the different value of S, the total cost will be different from the basic model.
In this model the number of inspections was found to go up when the value of gp ðSÞ is increasing. Table 4
shows the results of this model. The optimal solutions are tp ¼ 0:1985; np ¼ 2; and

Table 2
Data for raw materials

Item no. j Demand Dj (units/year) Holding cost hj ($/unit/year) Setup cost Sj ($) wj

1 1200 0.6 8 5
2 900 0.3 7 2.1
3 600 0.2 10 1.2
4 600 0.2 8 1.1
5 3600 0.2 8 1
6 120 0.15 10 0.7
7 1800 0.1 10 0.5
8 300 0.1 6 0.4
9 600 0.1 8 0.4
10 60 0.1 7.5 0.3
648 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

Table 3
Results of the basic model

n K1 K2 K3 K4 K5 K6 K7 K8 K9 K10 tp TCp

1 1 1 1 1 1 2 1 2 1 4 0.2638 814.78
2 1 1 1 1 1 2 1 1 1 3 0.289 800.41
3 1 1 1 1 1 2 1 1 1 3 0.3 811.17
4 1 1 1 1 1 2 1 1 1 3 0.3089 826.76
5 1 1 1 1 1 2 1 1 1 3 0.3169 843.68
6 1 1 1 1 1 2 1 1 1 3 0.3245 860.96

K ¼ [1,1,1,2,1,3,1,2,2,5]. The expected annual total cost is $677.43. The economic ordering frequencies
are 4, 4, 4, 2, 4, 2, 4, 2, 2, 1 for raw materials j ¼ 1; 2; …; 10; respectively.

7.3. The linearly deteriorating model

Suppose that, once the process is in the out-of-control state, it deteriorates in a linear fashion with the
rate of defects given by: 0.7 þ 0.9xi. Here the value of b( ¼ 0.9) is not small. Using Eq. (17) for
obtaining the expected annual total cost, the results are exactly the same as in the basic model. The b
value does not affect the optimal solutions. Therefore, the b value can be omitted and the basic model
can be used to obtain the optimal solutions for this model.

7.4. The limited capacity model

Suppose the available storage space for raw materials is limited. Using a solution procedure of
combining Algorithms 1 and 3 for this model, the optimal solutions are obtained as tp ¼ 0:0665; np ¼ 1;
and K ¼ [1,1,2,2,1,7,2,4,3,12]. The total cost is $1527.68. The economic ordering frequencies are 9, 9,
5, 5, 9, 2, 5, 3, 3, 1 for raw materials j ¼ 1; 2; …; 10; respectively. While using the same data set, the
optimal solutions of this model are found to be exactly the same as those of the basic model if the
available storage space, U, is greater than 3545 units (Table 5).

Table 4
Results of the model with deteriorating parameters as a function of setup costs

n K1 K2 K3 K4 K5 K6 K7 K8 K9 K10 gp ðSÞ tp TCp

1 1 1 1 2 1 3 1 2 2 5 0.148 0.1911 683.49

2 1 1 1 2 1 3 1 2 2 5 0.272 0.1985 677.43
3 1 1 1 2 1 3 1 2 2 5 0.373 0.2075 689.52
4 1 1 1 1 1 3 1 2 1 4 0.429 0.2257 692.91
5 1 1 1 1 1 3 1 2 1 4 0.490 0.2349 711.94
6 1 1 1 1 1 3 1 2 1 4 0.542 0.2439 731.67
 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650 649

Table 5
Results of the limited capacity model with U ¼ 2000

n K1 K2 K3 K4 K5 K6 K7 K8 K9 K10 lp tp TCp

1 1 1 2 2 1 7 2 4 3 12 0.0618 0.0665 1527.68

2 1 1 2 2 1 7 2 4 3 12 0.0618 0.0665 1609.35
3 1 1 2 2 1 7 2 4 3 12 0.0618 0.0665 1697.45
4 1 1 2 2 1 7 2 4 3 12 0.0618 0.0665 1786.83
5 1 1 2 2 1 7 2 4 3 12 0.0618 0.0669 1876.62
6 1 1 2 2 1 7 2 4 3 12 0.0618 0.0669 1966.59

Table 6
Range of the values of parameters used in the 50 hypothetical examples

Parameters Minimum Maximum

D (units/year) 400 800

P (units/year) 800 1200
S ($) 80 120
h ($/unit/year) 0.7 0.9
Sw ($/unit) 8 12
Sr ($/unit) 1 3
v ($) 8 12
r ($) 8 12
a 0.5 0.9
m 0.1 0.3

7.5. Sensitivity analysis

To perform a sensitivity study, fifty hypothetical examples for the basic model were solved to test the
deviations from (t p, n p, Kjp ) on the expected annual total cost. The values of the parameters were
selected randomly from the ranges given in Table 6. The percentage cost penalty (PCP) was used as a
measure of sensitivity. The results are summarized in Table 7. In the neighborhood of t p, given n ¼ np
and K ¼ K p ; the total cost curve was rather flat but not in the other neighborhoods of (t p, n p)
TCðt; n; K p Þ 2 TCðtp ; np ; K p Þ
PCP ¼ 100
TCðtp ; np ; K p Þ
It can be seen from Table 7 that the average value of PCP is rather flat in the neighborhood of (T p, n p).
Table 7
Average values of PCP in the neighborhood of TC(t p,n p,K p) in the 50 hypothetical examples

n\t 0.8t p 0.9t p tp 1.1t p 1.2t p

np 2 1 3.04 1.89 2.05 3.18 5.02

np 2.57 0.59 0.00 0.42 1.61
np þ 1 4.88 2.42 1.43 1.61 2.37
650 C.-S. Lin et al. / Computers & Industrial Engineering 44 (2003) 633–650

8. Conclusions

In this paper, the integrated EPQ models deal with the joint effects of maintenance policy by
inspection and the production-inventory system, including raw materials on the cost of operating a single
facility.
Periodic inspections and equally spaced inspection times are adopted to develop the basic model and
to determine the relationship of reworking cost and warranty cost. A solution procedure is developed to
obtain a near optimal production run time for the finished product, economic ordering quantity for each
raw material, and an inspection schedule. Such a production run time is found to be shorter than that of
the perfect production system. The time decreases as the number of raw materials or the warranty cost
increases. The model is extended for the situation where both the mean elapsed time of the shift and the
percentage of defective items produced is a function of the production setup cost. The analysis is further
extended to incorporate cases where the process will deteriorate linearly or exponentially after a certain
time. Finally, the model is directed toward a case that has a limited capacity for raw materials. Numerical
examples illustrate how the optimal production run, ordering frequency, and inspection times can be
derived for the various considerations.
Extensions of the basic model can be done in several directions. For example, if the process also
produces some defective items during the Ain-control@ state, then the percentage (a) of defective items
needs to be redefined. For future research, problems such as allowing for shortages, imperfect
inspections, unevenly spaced inspection times, and non-exponential distributions of elapsed time until a
shift occurs, provide further extensions.

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