Abstract:

Traditionally, the quality of product is not incorporated in the newsvendor problem. One approach to ensure the quality of the product is through process targeting. Selection of process mean is expected to determine production conforming rate and affects the newsvendor decision regarding the production lot size. The purpose of this paper is to integrate those two important issues, namely, process mean selection and production lot size for a newsvendor who produces the item at a finite rate. The newsvendor uses raw material to produce the item to satisfy a stochastic demand which follows a general distribution. The amount of raw material received by an item is uncertain and follows a normal distribution. It is assumed that the performance variable of the product has a lower specification limit, and the items that do not conform to the specification limit are scrapped with no salvage value. The expected total cost which consists of the following components: acquisition cost, production cost, underage cost, and overage cost is established. Upper and lower bounds on the optimal process mean are determined and a simple procedure to solve the model is devised. Sensitivity analysis is conducted to investigate the effect of the parameters of the proposed model.