Incorporating the cost of quality

in supply chain design

Amar Ramudhin
Department of Automated Manufacturing Engineering,
E

cole de Technologie Superieure, Montreal, Canada, and

Chaher Alzaman and Akif A. Bulgak
Department of Mechanical and Industrial Engineering, Concordia University,
Montreal, Canada
Abstract
Purpose This paper aims at exploring the challenges of introducing a model integrating the Cost of
Quality (COQ) into the modeling of a supply chain network.
Design/methodology/approach This paper introduces a comprehensive supply chain model that
minimizes a series of costs, in which COQ is integrated.
Findings The scenario of incorporating COQ in supply chain network design will ensure the lowest
overall cost, because it reduces the probability of defects and hence the probability of additional cost
which might be due to corrective action.
Practical implications With many industries today on the quest of improving their quality
systems, nding ways to reduce nonconformities and failure of products is crucial. In industries such
as the aerospace industry, the variable production cost is high; hence producing extra parts to
compensate for defectives would be a costly option.
Originality/value While COQ is a very good indicator of how much poor quality is costing a
company, no work has been published in regard to integrating COQ into supply chain modeling.
Keywords Supply chain management, Quality costs, Mathematical programming
Paper type Research paper
Introduction
A supply chain can be dened as an integrated process of various business entities
interacting with each other to source, process and distribute value added products or
services to customers. Those business entities can be generally categorized in four
categories: suppliers, manufacturers, distributors and retailers (Beamon, 1998). The
interactions between these entities insure the delivery of vital business processes.
These vital processes can be described as follows (Min and Zhou, 2002):
.
acquiring raw materials and parts;
.
transforming raw materials and parts into nished products;
.
adding value to these products;
.
distributing and promoting these products to retailers and in-turn to customers; and
.
facilitate information exchange among these entities.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1355-2511.htm
This research was supported in part by the Natural Sciences and Engineering Research Council
of Canada (NSERC) as well as funds from the Faculty of Engineering and Computer Science,
Concordia University, Montreal, Canada.
Incorporating
the cost of
quality
71
Journal of Quality in Maintenance
Engineering
Vol. 14 No. 1, 2008
pp. 71-86
qEmerald Group Publishing Limited
1355-2511
DOI 10.1108/13552510810861950
The supply chain not only includes the manufacturers and the suppliers, but also the
transporters, the warehouses, the retailers, and the customers themselves. The main
objective of a supply chain is to maximize the overall value generated (Chopra and
Meindl, 2001). From the customers point of view, a better denition of supply chain
can be thought of as a system consisting of all stages involved, directly or indirectly, in
fullling a customer request. The objective of a supply chain network is then to
minimize the end customers total level of dissatisfaction, composed of price, quality,
and delivery lead time (Cakravastia et al., 2002). So, a supply chain needs to be
congured in such a manner as to minimize cost while still maintaining a good quality
level to satisfy the end user.
While supply chain network design problems have been addressed before by a fair
number of researchers on the basis of operation costs, the idea of incorporating the cost
of quality into the network design is nonexistent in research. Knowing that most
supply chain models employ some form of a cost variable, it would be advantageous if
one can nd a cost indicator for quality which one could incorporate into the supply
chain modeling. Cost of Quality (COQ) is such a cost indicator for quality and would be
necessary to integrate into the supply chain models. Hence, this work aims at
incorporating COQ into the modeling of supply chain.
The rest of the paper is organized as follows: the next section resents a literature
review on supply chain network design. In the following section, the Cost of Quality
is dened and the relevant issues in this matter are discussed. In the next section, a
model that represents a single product, three-echelon system (i.e. suppliers, plants, and
customers) aiming at the minimization the overall operational and quality costs is
formulated. The model is nonlinear in nature, as it has nonlinearities in the objective
function and also in the constraints. The results are also shown and the signicance of
incorporating COQ in supply chain network design is discussed. The nal section
presents the conclusions and the future work.
Literature review in supply chain network design
A supply chain network design model aims at determining the location of production,
stocking, and sourcing facilities, and paths, which the product(s) take. Such models are
of large scale and require strong computational power. The earliest work in this area
was by Geoffrion and Graves and can be traced back to 1974. They introduced a
multi-commodity logistics network design model for optimizing the ow of nished
products from plants to distribution centers. Later, Breitman and Lucas (1987)
presented comprehensive models of a production-distribution system. The system they
provided was named PLANETS. PLANETS is a framework that decides what
products to produce, where and how to produce these products, and which market to
target with these products. PLANETS was an ambitious system which models almost
the whole scope of the supply chain. Some parts of their project were implemented
successfully at General Motors. Camm et al. (1997) presented a model analyzing Procter
& Gambles (P&Gs) supply chain. Their work sought improving the efciency of all
work processes and eliminating non-value added costs at P&G. The developed
methodology involved mathematical modeling. More specically, they developed a
model, which lumps integer programming, network optimization, and geographical
information system (GIS) together. The modeling strategy was to decompose the
overall supply-chain problem into two easily solvable sub-problems: a
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distribution-location problem and a product-sourcing problem. In the rst problem,
distribution location attributes are determined and then inputted into the production
sourcing problem for results.
As a general look at papers published with regards to supply chain modeling,
Beamon presented his 1998 review on the literature of supply chain modeling. He
classied supply chain models into four categories:
(1) analytical deterministic models;
(2) analytical stochastic models;
(3) economic models; and
(4) simulation models.
For the analytical models, one can note the works of Cohen and Lee (1989), Arntzen
et al. (1995), Voudouris (1996), and Camm et al. (1997). For the stochastic models, the
works of Cohen and Lee (1988), Svoronos and Zipkin (1991), Lee and Billington (1993),
and Pyke and Cohen (1993) can be noted. The works of Christy and Grout (1994), for
the economic models, and of Towill (1991), for the simulation models, can be regarded
as further examples.
Pivotal to this study, Arntzen et al. (1995) provided a deterministic model for supply
chain network design. The model went as far as considering duty and, more
specically, options for avoiding drawback duty charges. In their paper, the objective
function minimized a combination of cost and time elements. The function minimized
such cost elements as purchasing, manufacturing, pipeline inventory, transportation
between different plants or sites, and duty costs. The time elements in the objective
functions were manufacturing lead and transit times. Implementation of this models
resulted in magnicent savings at Digital Equipment Corporation as the paper
claimed. Additionally, Vidal and Goetschalck (2000) developed a mixed integer
programming (MIP) model that models a global logistic system (GLS). The model
attempts to include supplier reliability in the design. Supplier reliability, was modeled
using historic data, and estimates the probability that a supplier will send shipments
on time. They also studied the effect of exchange rates, changes in demand, and
international transportation lead times, on the model.
In recent studies, Jayaraman and Ross (2005) presented PLOT, which is a
production, logistics, outbound, and transportation design system. The overall system
produces near optimal distribution system utilizing simulated annealing. In their work,
the objective function minimizes xed costs to open warehouses and cross-docks, costs
to transport products from warehouses to cross-docks and costs to supply products
from cross-docks to satisfy the demand of customers. Melo et al. (2005) work focused on
the strategic design of supply chain networks. They proposed a mathematical
framework that captures dynamic planning horizon, generic supply chain network
structure, external supply of materials, inventory opportunities for goods, distribution
commodities, facility conguration, availability of capital for investments, and storage
limitations. Santoso et al. (2005) presented a stochastic programming model and
solution algorithm for solving supply chain network design problems. The
methodology, used in their work, is the sample average approximation (SSA)
scheme with an accelerated bender decomposition algorithm. Their objective function
minimized total investment and operational costs.
Incorporating
the cost of
quality
73
COQ
Our literature survey suggests that no work to this date had sought the integration of
COQ into the supply chain network design. A quality cost is dened as the expenditure
incurred by the producer, by the user and by the community, associated with the
quality of a product or a service (British Standards Institution, 1991). A quality-related
cost is dened as the expenditure incurred in defect prevention and appraisal activities
plus the losses due to internal and external failure (British Standards Institution, 1991).
Moreover, quality-related costs are dened as those costs incurred in ensuring and
assuring satisfactory quality as well as the losses incurred when satisfactory quality is
not achieved (British Standards Institution, 1995).
Quality costs are categorized into prevention, appraisal, and failure costs.
Prevention and appraisal costs are cost incurred to insure conformance (i.e.
conformance costs). Failure costs are costs incurred due to nonconformance (i.e.
nonconformance costs). According to Campanella (1991), quality costs are categorized
and dened, as follows:
(1) Prevention costs. The costs of all activities specically designed to prevent poor
quality in products or services.
(2) Appraisal costs. The costs associated with measuring, evaluating or auditing
products or services to assure conformance to quality standards and
performance requirement.
(3) Failure costs. The cost resulting from products or services not conforming to
requirement or customer/user needs. Failure costs are divided into internal and
external failure cost categories:
.
Internal failure costs. Failure costs occurring prior to delivery or shipment of
the product, or the furnishing of a service, to the customer.
.
External failure costs. Failure costs occurring after delivery or shipment of
the product, and during or after furnishing of a service, to the customer.
(4) Total quality costs. The sum of the above costs. It represent the difference
between the actual cost of a product or service and what the reduced cost would
be if there were no possibility of substandard service, failure of products, or
defects in their manufacture.
Methods of collecting COQ are well documented in literature. Each component of COQ
can be divided further into primary costs of activities that happen as a result of
prevention, appraisal, and failure. The list below shows some examples of quality costs
in each COQ category (Roden and Dale, 2001).
(1) Prevention costs:
.
quality engineering and training;
.
design and development of equipment;
.
quality planning by other functions;
.
maintenance and calibration of production and inspection equipment;
.
supplier assurance; and
.
administration, audit and improvement (ISO 9002 registration, customer
audits).
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(2) Appraisal costs:
.
inspection of components coming from supplier (inbound inspection);
.
in-process inspection;
.
after process inspection and testing (outbound inspection);
.
evaluating of eld stock;
.
production control; and
.
quality control.
(3) Internal failure costs:
.
cost of spoilage;
.
cost of rework; and
.
cost of scrap.
(4) External failure costs:
.
cost of troubleshooting the problem;
.
product liability cost;
.
repair on return material cost;
.
warranty cost; and
.
reputation loss cost.
Juran (1979) presented a graphical demonstration of how quality costs affect the overall
quality conformance of a given system (Figure 1). One can observe that as the quality
level rises, failure costs decline and appraisal plus prevention costs increase. We can also
infer that a relationship exists between the quality of conformance percentage, (1 2 y),
and prevention and appraisal costs on one count and with failure costs on another.
Model and ndings
Methodology
The model represents a single product, three-echelon system (i.e. suppliers, plants, and
customer groups) that aims at minimizing the overall operational and quality costs.
Figure 1.
Juran model of quality
Incorporating
the cost of
quality
75
Here, the perspective will be that of the supply chain as a whole, meaning suppliers are
subsidiaries of the supply chain and are an integral part of it; so the production cost
and other operational costs at the supplier would also be cost attributes for the supply
chain and would be accounted for in the model. The objective function of the model will
minimize a series of costs: total cost of production at the supplier, total cost of
transportation from suppliers to plants, cost of quality at the supplier, total production
cost at the plant, total cost of transportation from plants to customers. The input
parameters, decision variables, and constraint parameters are explained as follows:
Decision variables:
S
i;j;b
Number of good component b shipped from supplier i to plant j;
i [ I ; j [ J ; b [ B.
S
i;b
Number of component b manufactured at supplier i; i [ I ; b [ B.
S

Number of component b manufactured at supplier i for plant j;

i [ I ; j [ J ; b [ B.
X
j;k
Number of product produced at plant j to satisfy customer k demand;
j [ J ; k [ K.
z
j
Binary variable; 1 if plant j is open and running; 0 if plant j is shut; j [ J :.
y
i;b
Percentage of defectives at supplier i for component b; i [ I ; b [ B.
Parameters (input data):
PcC
i;j;b
Direct cost of component b procured from supplier i to plant j;
i [ I ; j [ J ; b [ B.
Pr C
j;k
Cost of producing one product at plant j for customer k; j [ J ; k [ K.
TrC
i;j;
b
Cost of transporting component b from supplier i to plant j;
i [ I ; j [ J ; b [ B.
fcoq
y
i
;b
Total cost of quality (including prevention and appraisal costs) for
supplier i per good component b as a function of y
i
, the level of proportion
of non-quality components. This is equivalent to the total cost of quality
in Figure 1; i [ I ; b [ B.
TC
j;k
Transportation cost of transporting a product from plant j to customer k;
j [ J ; k [ K..
Constraints input data:
D
k
Number of products demanded by customer k; k [ K.
SC
i;b
Capacity of Supplier i for component b; i [ I ; b [ B.
CAP
j
Allowable production capacity at plant j; j [ J .
N
b
Number of components b required to make a product; b [ B.
AD
i;b
Maximum acceptable proportion of defective of component b at supplier
i; i [ I ; b [ B.
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. The sets to which these parameters belong are the following:
B: Set of component types required for one product.
I: Set of suppliers.
J: Set of plants.
K: Set of customers.
The general non-linear mixed integer-programming model is as follows:
Min
i[I
X
j[J
X
b[B
X
PcC
i;j;b
S

i[I
X
j[J
X
b[B
X
TrC
i;j;
b
S
i;j;b

i[I
X
b[B
X
fcoq
y
i
;b
1 2y
i;b
S
i;b

j[J
X
k[K
X
Pr C
j;k
X
j;k

j[J
X
FC
j
z
j

j[J
X
k[K
X
TrC
j;k
X
j;k
1
Subject to:
j[J
X
X
j;k
D
k
;K 2
k[K
X
X
j;k
# CAP
j*
z
j
;j 3
k[K
X
N
b
X
j;k

i[I
X
S
i;j;b
;j; ;b 4
S
i;j;b
# S
0
1 2y
i;b
;i; ;j; ;b 5
j[J
X
S
0
# SC
i;b
;i; ;b 6
S
i;b

j[J
X
S
i;j;b
;i; ;b 7
y
i;b
# AD
i;b
;i; ;b 8
z
j
1 0; 1 f g; S
i;j;b
$ 0; S
0
$ 0; X
j;k
$ 0; y
i;b
$ 0:
The objective function minimizes the following costs respectively:
(1) direct cost of procuring components from suppliers;
(2) transportation cost from suppliers to plants;
Incorporating
the cost of
quality
77
(3) total quality cost at suppliers;
(4) production cost at the plants;
(5) xed cost (FC) of producing products at plant j; and
(6) transportation cost from plants to customers.
The constraints in our model start with constraint (2), which ensures that all plants are
producing enough products to meet customers demand. Constraint (3) ensures that no
plants production exceeds its capacity given it has been open for production.
Constraint (4) ensures that the suppliers will produce enough components for the
number of products demanded at the plants. Constraint (5) relates the amount shipped
to the quantity produced at each supplier compensating for defective products. We
assume that only good products are shipped to the plants (hence a 100 percent
inspection at the supplier). Constraint (6) is a supplier capacity constraint and it
ensures that suppliers capacity is not exceeded. Constraint (7) sums the total number
of good component of type b produced by supplier i. And constraint (8) places a bound
on the maximum proportion of defective allowed.
To solve the model, few assumptions are needed to be made in order to simplify the
problem so it could be solved by common industrial software, such as Lingo. If one
assumes a single component system supplied from the suppliers, then the b term in all
the variables and parameters will be dropped out. For instance, PcC
i;j;b
, which was
dened as the direct cost of component b procured from a given supplier to a given
plant, in the model will be transformed into PcC
i;j
, which is now the cost of procuring a
component from supplier i to plant j.
Going back to the perspective of viewing the supply chain as an integrated network,
meaning that suppliers are subsidiaries of the ownership of the whole supply chain,
production cost at the supplier becomes an operational parameter and our denition of
PcC
i;j
as a procurement cost will be transformed toPcC
i
, production cost at supplier i;
similarly the same analogy is preserved for all other variables and parameters:
.
Input parameters: PcC
i
, Pr C
j
, fcoq
y
i
,TrC
j;k
, and TC
i;j
.
Decision variables: S
i
, S
i;j
,X
j;k
, z
j
, and y
i
.
Constraint parameters: D
k
, SC
i
, CAP
j
, AD
i
, and N
b
The S
0
termis eliminated, as the total number of components b procured from supplier i
to plant j is transformed to the total number of components produced at supplier i, S
i
.
Based on these assumptions, the model is constructed and solutions are obtained
using Lingo 9.0. Constraint 8 was annulled for the purpose of optimizing y freely; so an
optimal y is fetched. The data sets for the problem are generated in an attempt to cover
a wide range of practical situations. For instance, the results in this paper are for a
six-supplier, three-plant, and two-customer supply chain network; our data sets
contested different practical scenarios in regard to the COQ functions. For the situation
where suppliers are operating at a high quality cost, we have simulated two suppliers
COQ functions accordingly. For situations where suppliers are running at low quality
costs two COQ functions were simulated and another two for low quality costs were
also simulated. This is done, so the quality functions are representative of different
practical scenarios.
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Moreover, different data sets were used to solve the model. Those data sets
represented many different cost scenarios and practical situations. In this paper we
used one of the data sets, as an example, in order to be consistent, especially when
comparing the three different cases we have contested in the model. Other data sets
will yield solutions with several variations from the illustrative example given.
Tables I-IV contain the data sets for our problem as well as optimal values of the
decision variables in our model. The value of N, which is the number of components
required to make a product, is set to a value of 3. And the optimal value of the objective
function is obtained as $641,730.179. In the tables, it is important to note that
SG i; j

S
i;j
, XT j X
j
(the sum of all products made at plant j), and
X j; k

X
j;k
.
Figure 2 shows the logistic routes the model chooses once it reaches optimality. The
model optimizes the network in accordance to operational costs and quality costs.
The solutions presented are for a network of six-suppliers, three-plants, and
two-customers and were fetched by Lingo in less than a second timing (Figure 2). The
quality functions are tabulated in Table III, among other parameters and were
simulated to resemble polynomial functions of second order, inspired by Jurans
Customers (k)
Plants ( j) 1 2
TC( j,k)
1 1.0 1.1
2 1.0 1.0
3 1.1 1.0
X(j,k)
1 1,250 250
2 0 1,050
3 0 0
Table I.
Input and output model
parameters
Plants ( j)
Suppliers (i ) 1 2 3
SG(i,j), decision variable
1 2,400 0 0
2 0 2,244 0
3 0 729 0
4 2,100 177 0
5 0 0 0
6 0 0 0
TrC(i,j), input parameter
1 1.00 1.20 1.30
2 1.20 1.10 1.25
3 1.20 1.00 1.25
4 1.10 1.15 1.05
5 1.20 1.10 1.00
6 1.20 1.10 1.00
Table II.
Input and output model
parameters
Incorporating
the cost of
quality
79
graphical presentation (Figure 1), COQ as a function ofy
i
. One can observe that the
most prevalent (i.e. constitutes high COQ) quality cost function is that of supplier 1,
produced at zero percent of defectives (Table II). This validates the model when the
cost of failure is high, consequently the model produced at zero defectives.
Special case
Lingo was able to solve the small model of six suppliers, three plants, and two
customers. However, when bigger models were contested (i.e. models with more
suppliers, plants, and customers) Lingo failed to bring about an optimal solution. With
nonlinearities present both in the objective function and in the constraints, the problem
is challenging to solve. Also the nonlinear constraints are binding and hence are more
difcult to relax. Many solution methodologies in literature propose the linearization of
Figure 2.
Optimal logistic routes
Model input parameters
Decision
variables Input parameter
Plants F PrC Capacity XT Z Customers Demand
1 11,000 100 1,500 1,500 1 1 1,250
2 10,000 102 1,500 1,050 1 2 1,300
3 9,000 104 1,500 0 0
Table IV.
Input and output model
parameters
Model input parameters Decision variables
Suppliers PcC SC fcoq (quality function) S y
1 35.5000 2400.0000 119y
2
2 39y 7 2,400.0000 0.0000
2 35.7000 2400.0000 118y
2
2 60y 12 2,400.0000 0.0651
3 35.0000 2400.0000 60y
2
2 60y 17 830.0259 0.1218
4 35.2000 2400.0000 45y
2
2 44.6y 14.5 2,400.0000 0.0512
5 34.0000 2400.0000 49y
2
2 63y 23.8 0.0000 NA
6 34.0000 2400.0000 68y
2
2 76.5y 25 0.0000 NA
Table III.
Input and output model
parameters
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the constraint successively. In doing so, an optimal solution can be fetched. For the
relatively small model presented in this paper, the linear approximation is viable and
can produce good results. As the model gets bigger, the linearization of the constraints
will be more difcult and more calculation extensive. For this, exact solution might not
be economical and hence the simplication of the model would be needed.
The model poses several challenges to solve due to:
(1) the total cost of quality function fcoq
y
i
in the objective function is non-linear;
(2) both S
i
and y
i
are variables creating another non-linearity in the objective
function;
(3) constraint (5) involves a multiplication of two unknown quantities S
i *
y
i
and is
hence non-linear; and
(4) variables z
j
are binary in nature.
If the y values for all suppliers were xed, then issues 2 and 3 above disappeared and
the problem becomes a special case one. y
i
is now an input to the model and hence
constraint 8 would be eliminated. There are two motives for this simplication; a
solution methodology motive and a practical application-oriented motive. The rst
motive is based on the fact that most approaches, in solving a nonlinear model with
nonlinearity both in the objective function and in the constraints, rely on some form of
successive linearization. As the model size of the model increases, optimality becomes
difcult to achieve in such cases. When y is xed, the model becomes linear; hence easy
to solve. The other motive is an application-oriented motive. Management of the supply
chain network can wish to have all entities in the supply chain working at the same
percent of defectives and might focus on the overall cost of achieving such a scenario.
In Figure 3, one can observe that at high defect ratios (i.e. high ys) the overall
objective value increases. An increase in defectives will have a consequence of a
corresponding increase in production cost, as we need to compensate for defective
products by producing more. Alternatively, a decrease in y will cause an increase in
quality costs and hence an increase the overall objective value. The graph
demonstrates an initial decrease of the objective value for low values of y and
Figure 3.
Graph of the values of the
objective function vs
percent of defectives
Incorporating
the cost of
quality
81
sequential increase later for the objective values for higher y values, which concurs
with the previous two statements.
Referring back to the original problem, for smaller problems Lingo was capable of
solving the problem. But for larger problems, there are possible directions for solving
the model. The method of Lagrangian relaxation can possibly be benecial in solving
the model. Also, as mentioned in this section, when y is xed the model becomes linear
and easy to solve. Hence, other methods can be constructed to exploit this special
characteristic in the model.
Impact of COQ
This section illustrates the impact of incorporating COQ into the supply chain
network. In order to address this, the model presented previously (i.e. the COQ
integrated into the supply chain network model) was modied by removing the
COQ terms from the model (i.e. the basic supply chain network model). Looking
back at the integrated model, if we were to remove the cost of quality term, the
P
i[I
P
b[B
fcoq
y
i
;b
1 2y
i;b
S
i;b
term, from the objective function then the objective
function will be free of quality related terms. In addition, the constraint 5, S
i;j;b
#
S
0
1 2y
i;b
would also need to be eliminated. In doing so, the integrated model will be
transformed into the basic supply chain network model. The basic model was solved
with the same data sets used above. Tables V-VIII present the results of the basic model.
As both models were solved using the same data sets, the results can be compared
as follows: In the integrated model, the value of the objective function was obtained to
be $641,730. In the latter case (i.e. COQ not incorporated), the value of the function was
$552,295; indicating a difference of approximately 16 percent. This difference is due to
the contribution of COQ into the overall operation. This cost would have been hidden if
one were not to include COQ in the model.
Moreover, when COQ was not incorporated into the model (Figure 4), it can be seen
that suppliers 1 and 2 were no longer furnishing any material to any of the plants
according to the optimal solution from the basic model. Suppliers 1 and 2 with a
better COQ structure no longer dispensed any material to any plant. Alternatively, the
optimal network solution from the basic model chooses the suppliers 5 and 6 despite
the fact that the failure costs at these two suppliers were high. Hence, solutions from
the basic model, if implemented, will be prone to potential future problems at the plants
as well as throughout the network. Nonconformance costs will eventually outweigh the
Customers (k)
Plants ( j) 1 2
TC( j,k)
1 1.0 1.1
2 1.0 1.0
3 1.1 1.0
X(j,k)
1 1,250 250
2 0 1,050
3 0 0
Table V.
Input and output model
parameters
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cost savings in the latter network. When one also considers issues of delays, inventory,
and reputation, the benets of incorporating COQ will outweigh the latter case.
With COQ incorporated into supply chain network design, suppliers behavior in
regard to quality issues will be scrutinized. Suppliers whom are incurring high cost of
quality will be less competitive or attractive even if they were to produce at lower costs.
As shown, if we were to compare the two different scenarios, one with COQ not
included in the design of the supply chain network and one with COQ included. In the
rst, the nal optimal network will choose key suppliers who have low costs. No
information is inferred in regard to the quality nonconformance cost. In this scenario a
supplier that is running at a high quality nonconformance cost is treated similarly to
Plants ( j)
Suppliers (i) 1 2 3
TrC(i,j)
1 1.00 1.20 1.30
2 1.20 1.10 1.25
3 1.20 1.00 1.25
4 1.10 1.15 1.05
5 1.20 1.10 1.00
6 1.20 1.10 1.00
SG(i,j)
1 0 0 0
2 0 0 0
3 0 2,400 0
4 450 0 0
5 2,400 0 0
6 1,650 750 0
Table VI.
Input and output model
parameters
Model input parameters Decision variables
Suppliers PcC SC fcoq (quality function) S y
1 35.50 2400 119y
2
2 39y 7 0 NA
2 35.70 2400 118y
2
2 60y 12 0 NA
3 35.00 2400 60y
2
2 60y 17 2,400 NA
4 35.20 2400 45y
2
2 44.6y 14.5 450 NA
5 34.00 2400 49y
2
2 63y 23.8 2,400 NA
6 34.00 2400 68y
2
2 76.5y 25 2,400 NA
Table VII.
Input and output model
parameters
Model input parameters
Decision
variables Input parameter
Plants F PrC Capacity XT Z Customers Demand
1 11,000 100 1,500 1,500 1 1 1,250
2 10,000 102 1,500 1,050 1 2 1,300
3 9,000 104 1,500 0 0
Table VIII.
Input and output model
parameters
Incorporating
the cost of
quality
83
the one that is operating at a lower quality nonconformance cost, given they both have
the same production cost. Even if that supplier has a lower production cost, if chosen,
additional costs would result due to product failures; this in turns would disburse the
savings realized initially. Hence, choices made solely on production cost could sacrice
quality and incite additional quality nonconformance costs. The scenario of
incorporating COQ in supply chain network design will ensure the lowest overall
cost, because it reduces the probability of defective and hence the probability of
additional cost which might be due to corrective action.
Conclusions and future work
Supply chain network design (SCND) is an important problem and attracts the
attention of many researchers. However, no research has been done so far to integrate
the vital concept of Cost of Quality into the network designs. This study attempts to
incorporate COQ in SCND. We have modeled COQ into SCND using a nonlinear
mathematical programming model. The non-linearity in the objective function,
represented by the convex quality functions, and the nonlinearity present presented in
the constraints have not deterred us from achieving insightful results. The quality
functions that were used are valuable as they can represent mathematically the quality
system of a given supplier. While, COQ costing differ among different companies, one
can most certainly analyze the behavior of COQ with respect to y, and infer a
mathematical function to represent it. Hence, using functions, we can bypass the
complications of accounting systems and infer costs, which correspond to percent of
defectives, which can be related to production costs. Our model had not only sought the
optimal quality level but had realized a solution which takes into account day to day
tradeoffs in supply chain operations. By minimizing the overall cost of the supply
chain we have fetched a reasonable y that is low enough to deter extra cost of
reproduction and high enough as not to drive COQ up.
Just like COQ was modeled at the suppliers, it can be also modeled at the plant.
Although in this study COQ was ignored at the plant, further research could model
COQ at both supplier and plants simultaneously. Also, further research could address a
multi-product sourcing and distribution network. This will increase the number of
decision variables and the number of constraints in the model and will add more
complexity to the bill of material parameters, producing more interrelations between
Figure 4.
Optimal network for the
case when COQ is not
incorporated into the
model
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parameters and decision variables. The complexity of such a problem would perhaps
be implausible to solve by Lingo and would eventually require the formulation of a
solution methodology that might take advantage of any special characteristics of our
objective function and constraints. As alternative means of solving more complex and
larger models, we will investigate using some stochastic search procedures such as
tabu search or genetic algorithms.
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Corresponding author
Amar Ramudhin can be contacted at: amar.ramudhin@etsmtl.ca
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