Determining the optimal target for a process with multiple markets and variable holding costs

The determination of the quality target for a manufacturing process represents an intricate and fiscally vital decision. This study examines methods for process target optimization in industries where several grades of consumer specifications (and hence several quality-grades of products) may be sold within the same market. In such situations, manufacturers may hold goods that have been rejected by one customer to sell the same goods to another consumer in the same market at a later date. The expected profit function for such firms must consider the holding costs as well as the profits associated with this sales strategy. This study provides a conceptual and mathematical overview of such situations. A method for identifying the optimal process target that reflects holding costs is presented and illustrated in the context of the steel galvanization industry.