The Influence of Quality Inspections on the Optimal Safety Stock Level

Due to yields of less than 50% during the production of curved glass for the displays on their new cell phone series, Samsung has to deal with higher than expected production costs of several million dollars. Where there is random yield, production costs as well as holding costs can be reduced by introducing quality inspections, in which defective items are discarded before further production. To achieve the greatest cost savings, it is important to determine the optimal number and positions of these inspections across the production process which, due to several influencing parameters, is not simple. We show how the positions of inspection within a production process influence the safety stock level that is required to buffer against uncertainties due to demand and yield randomness. Our approach is the first one, combining decisions about the number and positions of inspections with inventory control strategies in a warehouse. We achieve a maximum safety stock reduction of more than 30% in our examples, which can be even larger depending on the parameter setting. For a company like Intel, reporting inventories for finished goods of nearly 1.5 billion dollars in the 2014 annual report, this allows for significant savings.