Thank you P_Bartell for your response:
Below I have tried to be more specific.
Say I got A and B as significant factor to get C as response variable.
A can be from 9-11, with nominal as 10
B can be 19-21, with nominal as 20
So I will run one more DOE with A having three levels 8,10 and 12 (intentionally kept it 1 additional on both sides)
B will also have three levels 18,20 and 22 (again intentionally increased it be 1 on both sides)
Now, I may get a more precise regression equation for A and B modeling the outcome C.
Now if my scrap rate is say 3%, I will vary the mean and tolerance zone of A and B such that the output values for C are within the 3% scrap rate.
This way I can have the maximum tolerance on the expensive part (say machining) A while B can be reduced to a possible limit.
This is for when we are still in the prototype phase of the component and we don't have much production data available with us.
This will give us a good ball park, doing changes later on is very expensive.
Prototype vs Production correlation will be another challenge, but at least it will give us some data point about the possible changes for next project.
Do we have any other better way to decide on the tolerances?