Optimal demand rate, lot sizing, and process reliability improvement decisions

Because product quality is not always perfect in practice, process reliability improvement is an important managerial concern. This study considers this reliability/quality issue in the context of linking production (lot sizing and inventory) and marketing (pricing) decisions. We address some modeling issues of a related previous study. We develop a profit-maximization model, which we investigate under two different decision-making approaches to linking production and marketing (sequential and joint decisions). Calculus and geometric programming are used to solve the model, to compare the decisions from the two approaches analytically, and to develop a practical heuristic approach. The comparative results show that decision patterns can be the opposite of the optimal decisions for the perfect-quality case reported in the literature.