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This paper deals with serial manufacturing systems with imperfect inspection and rework of defective items. An inspector may not correctly identify a defective item; however, nondefective items are always correctly identified. Inspection stations, when they are used, screen all incoming units. Our objective is to develop a method that will determine which process steps to improve, the amount of process improvement, and the placement of inspection stations so that the expected per unit total cost of production is minimized. The dynamics of the process is modelled as a Markov renewal process and a gradient search procedure is used to optimize process improvement. [ABSTRACT FROM AUTHOR]