Two-Echelon Inventory Optimization for Imperfect Production System under Quality Competition Environment

This paper develops two integrated optimization models of two-echelon inventory for imperfect production system under quality competition environment, in which the vendor’s production process is assumed to be imperfect, and JIT delivery policy is implemented to ship product from the vendor to the buyer. In the first model, product defect rate is fixed, and, in the second model, quality improvement investment is function of defect rate. The optimal policies of ordering quantity of buyer and shipment from vendor to buyer are obtained to minimize the expected annual total cost of vendor and buyer. Numerical examples are used to demonstrate the effectiveness and feasibility of the models. Sensitivity analysis is taken to analyze the impact of demand, production rate, and defect rate on the solution. Implications are highlighted in that both the vendor and the buyer can benefit from the vendor’s investing in quality improvement.