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DESCRIPTION

 To determine batch size for purchased or produced

items.

 It is deciding how much to order and when to order.

 Lot sizing models determine the optimal timing and

level of production.
 FEATURES

 Lot-for-lot techniques order just what is required for

production based on net requirements:

 May not always be feasible.

 If setup costs are high, costs may be high as

well.
 LOTSIZING TECHNIQUES

Economic Order Quantity (EOQ)

Lot For Lot (L4L)
Minimum Cost Per Period (Silver Method)
Least Total Cost (LTC)
Least Unit Cost (LUC)
Part Period Balancing (PPB)
McLaren’s Order Moment (MOM)
Groff’s Algorithm
Freeland and Colley
Two types of demand :
Constant Demand
 A decision rule that orders the same quantity each time
an order is placed.
 EOQ is the example of this procedure.

Lumpy Demand
 The models consider the problem of determining
production lot sizes when demand varies with the time.
 Groff’s Algorithm, Least Unit Cost (LUC),Part Period
Balancing (PPB).
 RULES FOR LOT SIZING

Heuristic rules: aim at achieving a low-cost solution that is

not necessarily optimal . Least unit cost , Silver Method,
Part Period Balancing.

Wagner- Whitin rules: is an optimization approach to lumpy

demand.
 TERMS USED

Gross Requirement
Actual demand in case of final product

Project On Hand
Current inventory at the end of period.

Planned Order Released

Quantity , when orders needs to be received.
1.ECONOMIC ORDER QUANTITY

ASSUMPTIONS
 The demand for the item is constant and known
with certainty.
 There are no upper or lower limits on the order
quantity (lotsize).
 There are no quantity discounts.
 Lead time and supply are known with certainty; lead
time is constant.
 Order quantities for individual items are made
independently.
 EXAMPLE

Holding cost = $2/week; Setup cost = $200; Average weekly

gross requirements = 27 and Lead Time=1 week.

0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
 EOQ EXAMPLE
Demand should be dependent.

Q’= √(2ds/h)
= √(2*27*200/2)
= 74
where,
D = Demand rate (in units per year)
s = constant set -up to produce (purchase) a
lot
h = holding cost;
Q’ = lot size (in units).
 0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 44 4 4 68 28 72 72 42 61
POR 74 74 74 74

Total cost = setup cost + holding cost

Total cost = 4 x 200 + (44+4+4+68+28+72+72+72+42+61)x2

Total cost = 600+790

Total cost = $1,590

 Advantages
Yields minimum total setup/ordering plus holding costs.
Assumes relatively constant demand.
 Limitations

Not valid for

- Lumpy demand
- Dependent demand.
 Variations

Least Total Cost , Least Unit Cost , Part Period

Balancing.
 2.LOT FOR LOT example
The L4L technique:
 The lots are put together by searching in a greedy
way for the combinations that reduce the costs
most and ensure feasibility.
 Order (or produce) exactly the quantity required in

each period to satisfy gross requirements and to

maintain safety stock at its required level.
 Simple to use, and agrees with Just-In-Time
philosophy of ordering/producing only when
required.
 Lot size can be modified easily for purchase
discounts or restrictions, scrap allowances, process
constraints etc.
 Lot (L4L) rule sets the lot size in such a way that no
inventory is carried from one period to the other.
 0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 0 0 0 0 0 0 0 0 0
POR 30 40 0 10 40 30 0 30 55 0

No on-hand inventory is carried through the system total holding cost = $0

There are seven setups for this item in this plan

Total cost = setup cost + holding cost

= 7 x $200 +0

= $1400
Advantages
 Minimizes carrying costs.

 Is certainly the best method for

- highly discontinuous demand

- expensive purchased items
Limitations
 Minimizes on-hand inventory, but maximizes number
of orders placed (so can be expensive if
setup/ordering costs are significant).
 3.SILVER MEAL METHOD
Assumption:
Variable deterministic demand

Decision variable:

⇒ T – number of periods of demand that will be

covered with a particular order
⇒ T is selected by minimizing the total inventory
costs in time interval T:

Inventory holding cost + Ordering cost

T
 Trial Lot Size
PPB Example
Periods
Combined
(cumulative net
requirements) Cumulative
CPP

2 30 200 200/1=200
2, 3 701 2 3
280 4
= 40 x 2 5x 1+200
6 7 8 9 10
280/2=140
2, 3, 4
Gross 70 280 = 40 x 2 x 1+200 280/3=93.33
35 30 40 0 10 40 30 0 30 55
requirements
2, 3, 4, 5 80 340 = 40 x 2 x 1+10 x 2 x 3+200 340/4=85
2, 3, 4, 5, 6
Scheduled 120 660 = 40 x 2 x 1+10 x 2 x 3 +
receipts 40 x 2 x 4+200 660/5=132
Projected on Combine periods 2 - 5
35
hand
6 40 200 200/1=200
Net
6, 7 70 260 = 30 x 2 x 1+200 260/2=130
requirements
6, 7, 8 70 260 = 30 x 2 x 1+200 260/3=86.67
Planned
6, 7, 8,order
9 100 440 = 30 x 2 x1+ 30 x 2 x 3
receipts
+200 440/4=110
Planned order Combine periods 6 - 9
releases

9 30 200 200/1=200
10 Holding
85cost = $1/week;
310=55 x 2Setup
+200, cost = $100; 310/2=155
EPP = cost
Total 100 units 600+ 310 = 910
 0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 50 10 10 0 30 0 0 55 0
POR 80 70 85

Total cost = setup cost + holding cost

Total cost = 3 x 200 + (50+10+10+30+55)x2

Total cost = 600+310

Total cost = $910

Advantages
 It is for single level, capacitated lot sizing
problem.
 The largest decrease in average cost per unit
time (Silver Meal cost criterion) per unit of capacity
absorbed.
 Minimizes cost per period.

Limitations
 Not minimizes cost per unit.
 4.LEAST UNIT COST
 Least Unit Cost is a heuristic similar to the Silver-
Meal method, except that instead of dividing the cost over j
periods by the number of periods, j, we divide it by the
total number of units demanded through period j, r1 + r2 +
… + rj.
 Trial Lot Size
PPB Example
Periods
Combined
(cumulative net
requirements)Cumulative
CPP

2 30 200 200/30=6.67
2, 3 70 1 2
2803= 40 4x 2 x 51+2006 7 8 9 10
280/70=4.00
2, 3, 4
Gross 70 280 = 40 x 2+200 280/70=4.00
35 30 40 0 10 40 30 0 30 55
requirements
2, 3, 4, 5 80 340 = 40 x 2 x 1+10 x 2 x 3
Scheduled + 200 340/80=4.25
receipts Combine periods 2 - 3
4,5
Projected on 10 200 200/10=20
4,5,6 3550 280 = 40 x 2 x 1+200 280/50=5.60
hand
4,5,6, 7 80 400 = 40 x 2 x 1+ 30 x 2 x 2
Net
requirements + 200 400/80=5.00
4,5,6, 7, 8 80 Same 400/80=5.00
Planned order
4,5,6, 7, 8, 9
receipts 110 640 = 400+ 30x2x4 640/110=5.82
Combine periods 4 - 7
Planned order
releases
8, 9 30 200 = 120 x 2 +200 200/30=6.67
8,9,10 85 310=55 x 2 +200 310/85=3.65
Holding cost = $1/week; Setup cost = $100;
Combine
EPP =periods 8 - 10
100 units
Total cost = setup cost + holding cost

Total cost = 3 x 200 + (40+70+30+55)x2

Total cost = 600+390

Total cost = $990

0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 40 0 0 70 30 0 0 55 0
POR 70 80 85
Advantages
 Minimizes cost per unit.

Limitations
 The of both Silver-Meal and LUC approaches is
that they consider one lot at a time, and the cost per
period (or unit) can vary widely from period to
period.
 Not significant when setup cost is high.
5.LEAST TOTAL TECHNIQUE
 In the Least Total Cost, we tries to balance the total
inventory cost with the order cost.

 It is good where setup cost is significant.

 5.LEAST TOTAL TECHNIQUE
EXAMPLE
Period Demand Periods Carrying Cost Cummulative
Carried CC
2 30 0 0 0
2,3 40 1 80 80
2,3,4 0 2 0 80
2,3,4,5 10 3 60 140
2,3,4,5,6 40 4 320 460
Since on adding 6 cummulative exceeds setup cost.
6 40 0 0 0
6,7 30 1 60 60
6,7,8 0 2 0 60
6,7,8,9 30 3 180 240
Since on adding 6 cummulative exceeds setup cost.
9 30 0 0 0
9,10 55 1 110 110
At end lot in period 9 is 85
Total cost = setup cost + holding cost

Total cost = 3 x 200 + (80+60+60+110)

Total cost = 600+310

Total cost = $910

0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 50 10 10 0 30 0 0 55 0
POR 80 70 85
COMMONLY USED LOT
SIZING TECHNIQUES
Sr. Lot Sizing Used/Suitable
No Technique

1 Lot4Lot 1. Expensive/bulky items , perishable items or item

that requires little or no ordering cost.
2. Items with highly discontinuous demand(Service
parts).
3. Carrying cost is high.
2 EOQ , Luc 1. Items that are replenished in batches and whose
usage rates are low compared to batch size.
 6. Part Period Balancing

 PPB approach is a variation of the LTC method.

 The PPB procedure attempts to balance setup and holding
costs through the use of economic part periods (EPP).
 EPP = (setup cost)/(holding cost)

EPP=200/2
= 100

 Cost per setup = EPP * (holding cost/unit/period)

 PPB Calculations
Periods Requirement Cumulative Periods carried Cumulative Part periods
combined requirement
2 30 30 0 0
2,3 40 70 1 40 = 40 * 1
2,3,4 0 70 2 40
2,3,4,5 10 80 3 70 = 40 *1 + 10 * 3
2,3,4,5,6 40 120 4 230=40*1+10*3+40*4
(combine periods 2 through 5)
6 40 40 0 0
6,7 30 70 1 30
6,7,8 0 70 2 30
6,7,8,9 30 100 3 120 = 30 * 1 + 30 * 3

(combine periods 6 through 9)

10 55 55 0 0
 MRP Lot-Sizing Problem : PPB Approach

0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 50 10 10 0 60 30 30 0 0
POR 80 100 55

Holding cost = 70 *2 + 120 * 2

= $380

Set up cost = 200 * 3

= $600

Total cost = 380 +600

= $980
 7. McLaren’s Order Moment

 MOM method is similar to PPB.

 accumulate part periods until the target value is reached.


OMT = d (Σ t=1,T-1 t + (TBO-T)T )
OMT = order moment target
d = average requirements per period [270/10=27]
TBO = EOQ/d = time between orders [74/27=2.74]
T = largest integer less than (or equal) the TBO [2]
McLaren’s Order Moment


OMT = 27(Σt=1,2-1 t + (2.74-2)2)
= 67
 When the accumulated parts period equal or exceed this
value, a second test is done that determines whether to
include one more period in the lot:
h(k)Dt ≤ S 2(k)Dt ≤ 200
h = holding cost per period [$2]
S = setup cost [$200]
k = number of periods the will be carried
Dt = current period requirement
MOM Calculations
Period Requirements Period carried Part periods Cumulative part
periods
2 30 0 0 0
2,3 40 1 40 40
2,3,4 0 2 0 40
2,3,4,5 10 3 30 70

OMT = 67 , second test : Is 2(3)10 ≤ 200? :: yes, so include period 5

6 40 0 0 0
6,7 30 1 30 30
6,7,8 0 2 0 30
6,7,8,9 30 3 90 120

OMT = 67 , second test : Is 2(4)30 ≤ 200? :: no, so don’t include period 9

9 30 0 0 0
9,10 55 1 55 55
 MRP Lot-Sizing Problem : MOM Approach

0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 50 10 10 0 30 0 0 55 0
POR 80 70 85

Holding cost = 70 *2 + 30 * 2 + 55 * 2
= $310

Set up cost = 200 * 3

= $600

Total cost = 310 +600

= $910
8. groff’s algorithm

 Similar to MOM in that it considers the addition of a

future demand in a lot.
 If it satisfied:

n(n-1) Dn ≤ 2S/h 2S/h= 200

n = no. of periods carried

Dn = current period requirement

 Groff calculations
Period Requirements n n(n-1) Dn ≤ 200 Carrying cost
2 30 0 0 Yes 0
2,3 40 1 0 Yes 40*2*1=80
2,3,4 0 2 0 Yes 0
2,3,4,5 10 3 60 Yes 10*2*3=60
2,3,4,5,6 40 4 480 No 40*2*4=320
Do not include period 6 demand in the lot
6 40 0 0 Yes 0
6,7 30 1 0 Yes 30*2*1=60
6,7,8 0 2 0 Yes 0
6,7,8,9 30 3 180 Yes 30*2*3=180
6,7,8,9,10 55 4 660 No 55*2*4=440

Do not include period 10 demand in the lot

10 55 0 0 Yes 0
 MRP Lot-Sizing Problem : Groff Approach

0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 50 10 10 0 60 30 30 0 0
POR 80 100 55

Holding cost = (80 + 60) + (60 + 180)

= $380

Set up cost = 200 * 3

= $600

Total cost = 380 +600

= $980
9. Freeland and colley method

 This method also continues to add demands into a lot

until

h(t)Dt ≤ S
t = number of periods that inventory S= $200
carried
 FC calculations
Period Demand periods carried Carrying cost > 200?
2 30 0 0 No
2,3 40 1 80 No
2,3,4 0 2 0 No
2,3,4,5 10 3 60 No
2,3,4,5,6 40 4 320 Yes
Do not include period 6 demand in the lot
6 40 0 0 No
6,7 30 1 60 No
6,7,8 0 2 0 No
6,7,8,9 30 3 180 No
6,7,8,9,10 55 4 440 Yes
Do not include period 10 demand in the lot
10 55 0 0 No
 MRP Lot-Sizing Problem : FC Approach

0 1 2 3 4 5 6 7 8 9 10
GR 35 30 40 0 10 40 30 0 30 55
OH 35 0 50 10 10 0 60 30 30 0 0
POR 80 100 55

Holding cost = (80 + 60) + (60 + 180)

= $380

Set up cost = 200 * 3

= $600

Total cost = 380 +600

= $980
Comparison of lot sizing methods
Method Total cost
Minimum cost per period (Silver-Meal) $910
Least total cost $910
McLaren order moment (MOM) $910
Part period balancing (PPB) $980
Groff (GR) $980
Freeland and Colley (FC) $980
Period order quantity (POQ) $980
Least unit cost (LUC) $990
Lot-for-lot (L-4-L) $1400
Economic order quantity (EOQ) $1590
Evaluation of lot-sizing methods

 Nydick and Wesis conducted a large number of

simulation experiments on many of the lot-sizing rules.
which results are:
 L-4-L and EOQ rules performed very poorly.
 PPB, GR and MCP were the best.
 When the time period between orders is small, however,
almost all the rules tested provided the optimal solutions.
Use of lot sizing methods

 In 1979 Wemmerlov interviewed thirteen MRP users in

the mechanical and electronics industries

Technique Number of companies

Fixed period requirement 7

Lot-for-lot 6
Fixed order quantity 5
EOQ 4
Price breaks 3
Part period balancing 2
Planner decided lot sizes 2
Least total cost 1
result from survey
 Dynamic lot sizing techniques such as LTC and PPB
were used by very few companies.
 Companies avoid these techniques because changes in
top levels are transmitted down through lower stages,
producing system nervousness, or exaggerated
response at component level to small changes at parent
levels. At assembly and subassembly stages, the popular
lot-for-lot technique helped maintain stability and
minimized the amount of material tied up.
Conclusion from survey

 Overall, the usages of more complex methods is very

limited, mainly because the more complex methods are
not even included in many MRP computer software
packages.
 Some software companies will include them as custom
offerings, but there is a lack of interest in these
techniques.
references
Second Edition

PRODUCTION
PLANNING
AND
INVENTORY
CONTROL

Seetharama L. Narasimhan
University of Rode Island
Dennis W. McLeavey
University of Rhode Island
Peter J. Billington
University of southern Colorado

PHI Learning Private Limited

Queries…