Policies concerning decisions related to quality level

In a production environment, quality levels vary owing to various operational constraints. In an operational environment, the total relevant cost includes (i) production time cost, (ii) manufacturing facility setup cost and (iii) inventory carrying cost. Production time cost relates to the time for which a manufacturing facility runs. Setup cost is concerned with the expenditure incurred in arranging a facility to produce certain item. This is irrespective of the production quantity in one setup. Inventory carrying cost is estimated on the basis of an average inventory held in the system. Additionally a shortage cost is also incorporated in cases where the shortages are allowed. Variation in the quality level will affect the costs. Sometimes a decision has to be taken by either manufacturer or supplier to allow for high quality defects. These should be on the basis of certain principles/policies. Modifications are often made in the design of products so that the quality problems are less. Such design/development project costs the company and a decision is to be taken whether it is justified. The present paper develops certain policies which will be useful in supporting the decisions related to quality level. A strategic framework concerning supplier categorization/selection is also discussed. Few relevant propositions are further developed after providing a basic structure for their generation. In order to extend and develop the theory, shortages are briefly incorporated in the analysis. These shortages may be backordered completely or partially.