Optimizing Supply Chain Profit by Categorizing Non-reworkable Defective Items

Despite unprecedented quality improvement and defect prevention measures, producing a complete lot of perfect items is still highly unlikely due to the degradation of machines and processes over time. The previous studies on supply chains with defective/imperfect items have explored options such as process quality improvement investments, reworking, selling at a salvage value, or disposing of these items at an additional cost. This paper, contrary to existing literature, categorizes defective items into three types based on the level of imperfection: slightly, moderately, and highly defective items, and determines the optimal lot size for perfect and defective items. The focus is to develop a supply chain model for a single manufacturer and multiple retailers in the presence of defective items and manage defective products based on quality to generate profit from low-defective products rather than traditional defect rate reduction methods. Numerical examples and sensitivity analyses are presented to demonstrate the effectiveness of the proposed model in improving the total profit of the supply chain by optimizing production quantities.