Lot sizing and testing for items with uncertain quality

We consider the problem where items are produced in lots and sold with warranty. Due to manufacturing variability, some items do not conform to the design specifications and their performance is inferior (for example, have higher failure rate). The warranty servicing cost for these is much higher than for those which conform. Two approaches have been advocated for reducing the warranty cost per item released and in both it is achieved at the expense of increased manufacturing cost. The first involves life testing to weed out nonconforming items and the second involves strategies to reduce nonconforming items being produced. In this paper, the authors develop a model which combines both approaches and quality control decisions are made optimally to minimize the total (manufacturing and warranty) cost. It extends the earlier models of the authors which deals with quality decisions based solely on either the first or the second approach.