Determining the Most Profitable Target Value for a Production Process

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Abstract
In this paper the question of what is the best setting for the target value of an industrial process is explored. A simple graphical procedure is described which takes into account the regular and reduced selling prices, the give-away cost, and the process variability. The specific problem studied is as follows. Individual items are produced continuously from an industrial process. Each item is checked to determine whether it satisfies a critical lower (or upper) specification limit. If it does, it is sold at the regular price; if it does not, it is sold at a reduced price. The target value of a process is generally set somewhat above the lower specification limit (or below the upper specification limit). The further the target is set from the specification limit on the safe side, the lower the proportion of rejected items. However, there is an offsetting cost (sometimes called the give-away cost) which restricts the extent to which the target value can be profitably adjusted in this direction.

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