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International Journal of Systems Science

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Production system with process quality control:

modelling and application
Jia-Chi Tsou
Department of Business Administration , China University of Technology , No. 530, Sector.
3, Jung Shan Road, Hu Kou Township, Hsinchu County 303, Taiwan, ROC
Published online: 08 Jun 2010.

To cite this article: Jia-Chi Tsou (2010) Production system with process quality control: modelling and application,
International Journal of Systems Science, 41:7, 865-874, DOI: 10.1080/00207720903470130

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International Journal of Systems Science
Vol. 41, No. 7, July 2010, 865874

Production system with process quality control: modelling and application

Jia-Chi Tsou*
Department of Business Administration, China University of Technology, No. 530, Sector. 3, Jung Shan Road,
Hu Kou Township, Hsinchu County 303, Taiwan, ROC
(Received 3 June 2008; final version received 29 October 2009)

Over the past decade, there has been a great deal of research dedicated to the study of quality and the economics
of production. In this article, we develop a dynamic model which is based on the hypothesis of a traditional
economic production quantity model. Taguchis cost of poor quality is used to evaluate the cost of poor quality
in the dynamic production system. A practical case from the automotive industry, which uses the Six-sigma
DMAIC methodology, is discussed to verify the proposed model. This study shows that there is an optimal value
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of quality investment to make the production system reach a reasonable quality level and minimise the
production cost. Based on our model, the management can adjust its investment in quality improvement to
generate considerable financial return.
Keywords: Taguchi cost function; six-sigma; economics of production

1. Introduction process reliability into a classic economic order quan-

Product quality is a major concern in todays modern tity model. Hong, Xu, and Hayya (1993) established
production systems. Poor quality products decrease the relationship between process quality and invest-
customer satisfaction, reduce operating production, ment. Ng and Hui (1996) developed a cost model to
overall efficiency and increase the cost of business determine the optimal number of learning actions to be
operation. Accordingly, there have been a vast number taken and the optimal action limit. The model offers
of studies dedicated to the relationship between quality insight into the tradeoff of cost of quality and the cost
and economics of production over the past decade. of prevention. Banker, Khosla, and Sinha (1998)
Porteus (1986) was one of the earliest researchers to developed formal models of oligopolistic competition
provide a mathematical model to characterise optimal to investigate whether equilibrium level of quality
simultaneous investment in setup cost reduction and increases as competition intensifies. Krishnan, Kriebel,
quality improvement. Rosenblatt and Lee (1986) Kekre, and Mukhopodhayay (2000) examined the
formulated and analysed a similar model that considers relationship between life-cycle productivity and con-
investment in process improvements. In a subsequent formance quality in software products. Salameh and
article, Lee and Rosenblatt (1987) considered the use Jaber (2000) considered a special production/inventory
of process inspection during the production run so that situation where items, received or produced, are of
a shift to out-of-control state can be detected and imperfect quality. Ganeshan, Kulkarni, and Boone
restoration made earlier. Tapiero (1987) linked optimal (2001) brought Taguchis cost of poor quality into the
quality inspection policies to the resulting improve- economic production quantity model and linked
ments in manufacturing costs. Fine (1988) used a lot-size determination to the loss-based quality
stochastic dynamic programming model to character- accounting system. Jaber and Bonney (2003) investi-
ise optimal inspection policies and added the gated the effects that learning and forgetting in set-ups
quality-based learning effects into the model. Fine and product quality have on the economic lot-sizing
and Porteus (1989) refined Porteus original work to problem. Jaber and Guiffrida (2004) considered a
allow smaller investments overtime with potential modification of Wrights learning curve with no
process improvement of random magnitude. Chand discarded defects and constant defect rate. Tsou and
(1989) validated Porteus model when learning effect Chen (2005) developed a dynamic model for a defective
is present in setups and process quality. In a series of production system with Poka-Yoke. Wu and Xie
papers, Cheng (1989, 1991) included the production (2008) analysed the replacement cost for nonrepairable


ISSN 00207721 print/ISSN 14645319 online

2010 Taylor & Francis
DOI: 10.1080/00207720903470130
866 J.-C. Tsou

services products from a manufacturer perspective. I Investment on quality improvement

Uthayakumar and Parvathi (2009) investigated a during the N-th period planning horizon
continuous review inventory model to reduce lead K Taguchi loss parameter
time, yield variability and setup cost simultaneously L loss of poor quality per unit product
through capital investments. LSL lower specification limits
In this article, there are three significant contribu- N production period
tions to the production and quality research. First, P production cost of unit product
we develop a dynamic model that can help make joint Qi production lot size in period i
decisions on aspects of finance and quality, a task S setup cost per period
which is very difficult for the traditional production- U distance of the target mean from the
quality model. In our model, we focus on the financial specification limits
return of quality investment but not the lot-size USL upper specification limits
optimisation. Second, the Taguchis cost of poor (I) population mean of quality
quality factor has been brought into our model. This characteristic
extension makes it easier to evaluate the cost of poor 0 initial value of population mean of
quality in a dynamic production system. Third, a quality characteristic
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practical case in the automotive industry, which obeys t target value of population mean of
the Six-sigma DMAIC methodology, is discussed to quality characteristic function
verify the proposed model. (I) population standard deviation of quality
In the next section, we introduce the model characteristic
proposed in this article. Then, a quality improvement 02 initial level of the variance of the system
case in automotive industry is used to verify this L2 minimum level of the variance of the
model. In this case, the Six-sigma DMAIC methodol- system
ogy will be used in the process of problem solving. X value of the quality characteristic
Then, we analyse the production cost of the case, and
Each term in our objective function is defined
the optimal value of quality investment with minimum
as below:
production cost is found. The last section presents
conclusions for this article. X
Production cost Qi  P: 2

The first term in our model is the production cost.

2. The model
The production cost during the N-th period can be
We assume a dynamic production line over N-th written as the summation of the lot size multiplied by
periods. The primary goal of this model is to search out production cost of a unit product in every period.
the minimum cost of a production system. I is the
money spent on improving product quality. The total X
Holding cost hGi1 Qi  di : 3
cost, TC(I), is the combination of the production cost,
the holding cost, the setup cost, the poor quality cost
(PQC) and the cost of improving quality. This com- The second term in the equation is the holding cost.
bination is based on the hypothesis of the traditional The holding cost on the production line is the
EPQ model. The total cost, TC(I), can be written as: summation of the holding cost of the inventory in the
N-th period. In Equation (3), Gi1 is the inventory
TCI Production cost holding cost setup cost carried from pervious period, Qi is the production lot
poor quality cost cost of quality investment: size in period i and di is the demand. Gi1 Qi  di  is
1 the inventory in period i and hGi1 Qi  di  is the
holding cost in period i. Hence, the total holding cost is
The notation of our model is summarised below. equal to the summation of the holding cost from
Notation: period 1 to N.

Cr rejection cost/unit X

di : demand in period i Setup cost Qi  S: 4

D(I) quality distribution function; (normal
distribution function) The third term in our objective function is the setup
Gi1 inventory carried from period i to i 1 cost. Setup cost includes the cost to change the mould,
h holding cost per unit per period the cost to prepare material, the cost to adjust
International Journal of Systems Science 867

machines, etc. In our model, the setup cost is equal to 02 is the initial level of the variance of the system and
the summation of the setup cost in every period. In L2 is the minimum level of the variance of the system.
Equation (4), (Qi) is a function of lot size. (Qi) is As  0 0.1,  L 0.05 and b 0.01, the function,
equal to zero when lot size is zero and (Qi) is equal (I), can be drawn as Figure 2.
to one when lot size is larger than zero. There are two categories of the cost of poor quality.
N Z1 One is direct cost and the other is indirect cost. The
PQC Qi  L  DI dX: 5 direct PQC encompasses two major types of expendi-
i1 1 ture: controllable PQC and resultant PQC.
The fourth term is the cost of poor quality. This Controllable PQC includes prevention cost and
term is the summation of the product of lot size and appraisal cost. Resultant PQC includes internal error
Taguchis PQC of unit product in every period. cost and external error cost. The other category, the
In Equation (5), D(I) is the quality distribution indirect PQC, includes customer-incurred PQC,
function of production, and we suppose the quality customer-dissatisfaction PQC and loss-of-reputation
characteristic performs as a normal distributive func- PQC (Harrington 1987).
tion. Under this hypothesis, we can write the quality In order to link the costs of poor quality and
distributive function as: quality performance, Taguchi has provided a quadratic
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function to describe this relationship. Taguchi defines

1 2 2
DI p eXI =2I : quality as, The quality of a product is the (minimum)
I 2 loss imparted by the product to the society from the
(I) and (I) are defined as functions of quality time product is shipped (Bryne and Taguchi 1986).
investment, I. The value of (I) has an initial value and Taguchis function directly links to the internal error
a positive lower bound. The boundary is produced by cost and external error cost in direct PQC and indirect
the nature of the production system or the limiting of PQC. In our model, L has been used to denote
practice. It is noted as,  0, the initial level of the Taguchis function.
variance and,  L, the minimum level. In Taguchis function as shown in Figure 3, this cost
There is an initial mean of the population of quality reduces to zero when the output of the process exactly
characteristic, 0, and t is the target value of quality meets the target, and it increases quadratically as the
characteristic. Both (I) and (I) are functions of process moves away from the target. If X is the value of
quality investment, I. The function of (I) and (I) can the quality characteristic, Taguchis PQC function, L,
be written as (Hong et al. 1993; Ganeshan et al. 2001): can be expressed as (Taguchi and Wu 1985):
2 I 2t 20  2t eI ,  4 0: KX  t 2 if LSL  X  USL
0 is the initial value of population mean of quality Cr if X  LSL, X  USL
characteristic and t is the target value of population K Cr =U2
mean of quality characteristic.
As 0 4.99, t 5 and 0.01, the function, U USL  t t  LSL 6
(I), can be drawn as Figure 1. where K is defined as K Cr =U2 , Cr is the rejection
 I L2 02  L2 bI
e , b 4 0: cost of unit product and U is the distance of mean from
the specification limits. It is assumed that the upper

Figure 1. Relationship between population mean and quality Figure 2. Relationship between population standard devia-
investment. tion and quality investment.
868 J.-C. Tsou

Figure 3. Taguchis PQC function.

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specification limits (USL) and lower specification

limits (LSL) are equidistant from the mean, i.e.
U USL  t t  LSL. Cr includes the internal
error cost and external error cost in direct PQC and Figure 4. Roadmap of Six-sigma DMAIC methodology.
indirect PQC to reject one unit of product.
Quality investment cost I: 7 3. Six-sigma quality improvement case for the
The fifth term in the objective function is the cost automotive industry
of quality investment. We define the cost invested in In the next section, we will consider a practical
improving the product quality to ensure that only Six-sigma quality improvement case to verify our
customer-acceptable products and services are delivered model. The Six-sigma DMAIC methodology has
to the customer as the cost of quality investment, I. been diversely applied in different kinds of situations
It is believed that the total quality investment, I, will in current business operations, and quality improve-
affect the population mean and standard deviation ment is one of the most suitable conditions to use it
of product quality distribution in the mathematical (Harry and Schroeder 2000). The roadmap of
formula that we mentioned above. Six-sigma DMAIC methodology is shown in Figure 4.
Based on the definition above, we can develop the In the definition phase, things which are critical to
dynamic model of the cost of a defective production consumers (CTC) will be defined. What is the most
system. This is the objective function of our model. important thing to your consumer? What do they care
about? The purpose and goal of the Six-sigma project
will also be clearly defined in this phase.
Minimise TCI Qi  P hGi1 Qi  di 
i1 i1
In the measurement phase, the performance stan-
N dard of the process will be verified and the measure-
Qi  S Qi ment system will also be established to obtain a
i1 i1 baseline for improvement in the future. In the analysis
phase, the performance objective will be defined and
 L  DI dX I, the key variation sources will be identified. The
relationship between variation sources and perfor-
subject to mance objectives will also be established in this stage.
I, P  0, In the improvement phase, all the potential causes
will be screened and possible solutions will be verified.
G0 0
Improvement activities will be proposed in this phase.
and The process capability after improvement will also be
 confirmed in this phase. Finally, the long-term process
0 if Qi 0 control will be implemented in the control phase. The
Qi : 8
1 if Qi 4 0 control plan to maintain progress and verify the
International Journal of Systems Science 869
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Figure 5. Manufacturing process of a shock absorber.

measurement system in the future will also be 3.2. Measure

completed. All corrective actions will feedback to the The production manager gathered a group of experts
quality operation system. Now, we introduce a prac- to find the root causes of oil leaks. The C&E matrix
tical case in the automotive industry. and failure mode and effects analysis (FMEA) have
been used to determine the reasons. After analysis, it
was found that the root cause of the oil leakage
3.1. Define problem is defects in the bottom tube diameter. The
MACUTO Co. is a local supplier of shock absorbers. operation definition and measure system analysis to
This company produces vehicle and motorcycle shock measure the bottom tube diameter were developed in
absorbers, selling to both the original equipment this phase.
manufacturer (OEM) and after market with its own In historical records, the defect rate of this bottom
brand. Its management has found that the company tube is 4.65%, and this defect rate means a 3.18 sigma
loses a great deal of money in warranty claims every process. In the original design, the diameter of the
year. In order to decrease warranty cost and increase bottom tube was 5 cm, and the upper and lower
customer satisfaction, the production manager has specifications were 4.8 and 5.2 cm. After analysis, the
been assigned to reduce warranty claims, and the short-term process capability of the bottom tube
Six-sigma DMAIC method has been used in this manufacturing is 1.06 Cpk value. The population
assignment. To provide a clear picture of the related mean of the quality characteristic in present stage is
process, Figure 5 is the flow chart of the manufacturing 4.99 cm and the level of the variance of the production
process of the shock absorber. line is 0.01 cm2. In the original design of the production
In order to find the root causes, all the warranty line, the optimal level of the production variance is
claim parts were recalled for analysis. After analysis, it 0.0005 cm2.
was found that 87% of the warranty claims were
caused by oil leakage, 10% were due to noise and 2%
are from other issues. Based on the 80-20 rule, the oil
leakage problem was clearly recognised as the major 3.3. Analysis
concern for the quality issue. The drawing of the bottom tube is shown in Figure 6.
After companys experts opened the cover of According to the process failure mode and effects
damage shock absorber, they found that the oil had analysis (PFMEA) of the shock absorber, the defect
leaked from the gap between the bottom tube and the bottom tube will cause the oil leakage problem. We
internal tube. further check the assembly of the internal tube and the
870 J.-C. Tsou

bottom tube, and found that the assembly of the 3.5. Control
defective absorber was too loose. This evidence further We identified the bottom tube diameter as the high
supports our conclusion. We also arranged a series of impact characteristic (HIC) and drew X-bar R chart to
tests to verify our logic. According to the conclusion control the manufacturing process. All these actions
above, we focus on controlling the dimension of the were fed back to the quality control plan of shock
bottom tube, which is controlled by the dimension of absorber. We also fed back this case to the PFMEA of
the pressing mould in the manufacturing process. A the manufacturing process. To sustain the benefit of
picture of the pressing mould is shown in Figure 7, quality improvement in the long run, the board decided
indicating its two pieces: the external mould and the to invest some money in quality improvement every
internal mould. The matching of the external mould year, and how much money to invest is the topic of the
and the internal mould will determine the dimension of next section. This money should be spent both in
the bottom tube. prevention and in appraisal quality activities.
Prevention activities include: developing and imple-
menting a quality data-collecting and reporting system,
3.4. Improve developing the quality process control plan, quality-
related training, job-related training, preventing this
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We use the layout machine to measure the critical

dimension of the pressing mould, bottom tube and problem from recurring, etc. Appraisal activities
internal tube. After discussion with the master worker include: quality-assurance audit of the manufacturing
of the mould, we decided to shrink the diameter of the process, review of completed designs, review of test and
external mould from 50.8 to 50.3 mm, in order to inspection data, quality data processing and reporting,
decrease the variation and dimension of bottom tube field performance testing, etc.

4. Production cost in the dynamic production system

of shock absorber
In this section, we want to investigate closely the costs
of the absorber assembly line to verify the modifica-
tions proposed. We assume that there are 10 produc-
tion periods and that inventory in the beginning is 0.
The production cost is $12 for each absorber, and the
setup cost per production run is $100. The holding cost
is $0.05 per unit per period. The cost on each quality
claim is $15, including both material cost and labour
cost. We invest $1000 on quality improvement in the
overall production period, and assume that supply and
demand are changing with time. The supply and
demand for each period are listed in Table 1.
As we mentioned above, the target value of bottom
tube diameter is 5 cm and the upper and lower
specifications are 4.8 and 5.2 cm. The population
mean of quality characteristic at the initial stage is
4.99 cm, and the level of the variance of the production
Figure 6. Bottom tube of shock absorber. line is 0.01 cm2. In the original design of the production

Figure 7. Pressing mould of bottom tube: the internal mould (left) and the external mould (right).
International Journal of Systems Science 871

line, the minimum level of the production variance t target value of population mean of
was 0.0005 cm2. quality characteristic function 5 cm
With this information, the loss of poor quality 02 initial level of the variance of the
function, L, can be written as: system 0.01 cm2
( L2 minimum level of the variance of the
KX  t 2 if 4:8 cm  X  5:2 cm system 0.0005 cm2
L ,
Cr if X  4:8 cm, X  5:2 cm To calculate the objective function, we use the
K Cr =U , 2 computer software Mathematica 4.1 to do the calcu-
lation. The result has been listed in Table 2 and the
U 5:2  5 5  4:8 0:2 cm, computer program to do the calculation has been
shown in the appendix.
K 15=0:22 375:
The shifting of demand, supply, inventory and cost
The relationship between quality investment and is presented in Figures 811. In these figures, it can be
value of quality characteristic can be expressed as the noticed that the supply volume is the major effect too.
functions below: With the coefficient above, we can find the
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optimisation solution with the minimum production

2 I 2t 20  2t eI , 40 cost. The relationship between quality investment and
0:0001 total cost of production has been shown in Figure 12.
From software computation, the initial value of the
 I L2 M
2 2
 L2 ebI , b40
production cost is $80,755.90 when quality investment
b 0:00035 is zero. We notice that the total cost decreases with the
increasing of quality investment until reaching a
and b are constants to control the equation.
With information above, we find the value of
factors in our objective function as follows:
Table 2. Inventory and cost changing with time.
P production cost of unit product $12
I investment on quality improvement Period Supply Demand Inventory Cost
during the 10 period planning (time) (units) (units) (units) ($)
horizon $1000
1 500 450 50 7566.82
Cr rejection cost per unit $15
2 510 520 40 7713.61
S setup cost per period $100 3 490 510 20 7418.04
h holding cost per unit per period $0.05 4 510 480 50 7714.11
(per unit per period) 5 490 470 70 7420.54
G0 inventory in the beginning 0 6 500 510 60 7567.32
7 550 530 80 8304.76
N production period 10 8 490 510 60 7420.04
USL upper specification limits 5.2 cm 9 500 490 70 7567.82
LSL lower specification limits 4.8 cm 10 510 500 80 7715.61
0 initial value of population mean of Total 5050 4970 80 76,408.7
quality characteristic 4.99 cm

Table 1. Demand in every period.

Period (time) Supply (unit) Demand (unit)

1 500 450
2 510 520
3 490 510
4 510 480
5 490 470
6 500 510
7 550 530
8 490 510
9 500 490
10 510 500
Figure 8. The shifting of supply with time.
872 J.-C. Tsou

Figure 9. The shifting of demand with time. Figure 11. The shifting of cost with time.
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Figure 12. Relationship between quality investment and

total cost of production.

Figure 10. The shifting of inventory with time.

Based on our model, the management can adjust the
investment on quality improvement to generate remark-
minimum cost. Using the computer software
able financial return. The model can be diversely
Mathematica, we make the optimisation calculation
applied in different kinds of quality improvement
to find the minimum cost, as shown in the appendix.
cases. Further study in this field can focus on a quality
According to the calculation, the minimum production
investment model for a stochastic dynamic production
cost is $70,756.10 when the quality investment is
system. Research also may include more financial
factors or different quality evaluation models into the
Passing through the minimum cost, the total cost
increases with the increase in quality investment to
infinity. In managerial practice, the minimum produc-
tion cost is the ultimate target of business operation Notes on contributors
which means the appropriate quality investment to
Jia-Chi Tsou is an Associate Professor
reach a reasonable quality level and minimise the in the Department of Business
production cost. Administration at the China
University of Technology, Taiwan.
He received the PhD degree in
Industrial Management from the
5. Summary and conclusion National Central University, Taiwan.
He graduated with an MBA in
In this article, we develop a dynamic model based on the Entrepreneurship from the University
hypothesis of a traditional economic production quan- of Liverpool, UK. He also gained an MS and a BS in
tity model. Taguchis cost of poor quality has been used Mechanical Engineering at the National Central University,
to evaluate the cost of poor quality in the dynamic Taiwan. His current research interests include supply chain
production system. According to our research, there management and quality improvement in the automotive
industry. Dr Tsou is an IRCA (International Register of
is an optimal value of quality investment which Certificated Auditors) registered ISO 9001 Lead Assessor.
causes the production system to reach a reason- He has worked as six-Sigma master black belt at the Ford
able quality level and minimise the production cost. Motor Company.
International Journal of Systems Science 873

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Appendix A
J.-C. Tsou