Rework, the transformation of defective products generated during production period into serviceable ones, is an important issue in reverse logistics. This paper studies a production inventory system with rework where a stationary demand is satisfied either by production setup with new raw materials or by rework setup with defective items coming from production process. Through the formulation of mathematical models, we find simultaneously the optimal number of production and rework setups in a cycle, their sequence, and the economic production quantity of each setup. Numerical examples are solved to illustrate the validity of the solution procedure proposed. (C) 2008 Elsevier Ltd. All rights reserved.