Allocation of variance reduction targets under the influence of supplier interaction

A common quality improvement strategy used by manufacturers is to periodically allocate quality improvement targets among their suppliers. We propose a formal modelling and optimization approach for assessing quality improvement targets for suppliers. In this approach it is understood that a manufacturer's quality improvement results from reductions in supplier process variances, which occurs only through investments in learning. A constrained nonlinear optimization model is developed for determining an optimal allocation of variance reduction target that minimizes expected total cost, where the relationship between performance measures and the set of design parameters is generally represented by second-order polynomial functions. An example in the fabrication of a tyre tread compound is used both to demonstrate the implementation of our proposed models as well as to provide an empirical comparison of optimal learning rates for different functional relationships between the performance measures and the set of design parameters.