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In a recent paper, Ouyang et al. proposed a (Q,r,L) inventory model,with defective items in an arrival lot. The purpose of this study is to generalize Ouyang et al.’s model by allowing setup cost (A) as a decision variable in conjunction withorder quantity (Q), reorder point (r) and lead time (L). In this study, we first assumethat the lead time demand follows a normal distribution, and then relax this assumption by only assuming that the first two moments of the lead time demand are given. For each case, an algorithm procedure of finding the optimal solution is developed. | Yugoslav Journal of Operations Research 14 (2004), Number 2, 247-258 IMPACT OF DEFECTIVE ITEMS ON (Q, r, L) INVENTORY MODEL INVOLVING CONTROLLABLE SETUP COST Bor-Ren CHUANG, Liang-Yuh OUYANG*, Yu-Jen LIN Graduate Institute of Management Sciences, Tamkang University Tamsui,Taipei, Taiwan, R.O.C. * liangyuh@mail.tku.edu.tw Received: November 2004 / Accepted: March 2004 Abstract: In a recent paper, Ouyang et al. [10] proposed a (Q, r , L) inventory model with defective items in an arrival lot. The purpose of this study is to generalize Ouyang et al.’s [10] model by allowing setup cost ( A) as a decision variable in conjunction with order quantity (Q) , reorder point (r ) and lead time ( L) . In this study, we first assume that the lead time demand follows a normal distribution, and then relax this assumption by only assuming that the first two moments of the lead time demand are given. For each case, an algorithm procedure of finding the optimal solution is developed. Keywords: Inventory, defective items, setup cost, lead time, minimax distribution free procedure. 1. INTRODUCTION In traditional economic order quantity (EOQ) and economic production quantity (EPQ) models, setup cost is treaded as a constant. However, in practice, setup cost can be controlled and reduced through various efforts such as worker training, procedural changes and specialized equipment acquisition. Through the Japanese experience of using Just-In-Time (JIT) production, the advantages and benefits associated with efforts to reduce the setup cost can be clearly perceived. In the inventory literature, setup cost reduction models have been continually modified so as to achieve the real inventory situation. The initial result in the development of setup cost reduction model is that of Porteus [15] who introduced the concept and developed a framework of investing in reducing setup cost on EOQ model. Since this introduction, a lot of studies such as Nasri et al. [9], Kim et al. [5], Paknejad et al.
