Dr. S. S. BhakarDirector, PIMG

Lot size decision

impacts on

• Inventory levels

• Setup & ordering costs

• Capacity requirement

• Availability

Lot Size Decision is

Impacted By

• Number of Level in BOM

• Cost of setup or purchase order

• Cost of carrying an item in inventory

• Low level code of an item

Lot sizing decision – impacts on Determined

Lot Sizing & Safety Stock

Lot SizeItem quantity

that is made or purchased.

SafetyStock

Quantity of Stock planned to be in

inventory to protect against fluctuations in demand and / or

supply

Lot Sizing TechniquesFixed Order Quantity (FOQ)

Economic Order Quantity (EOQ)

Lot-for-lot (LRL)

Periods of Supply (POS)

Period Order Quantity (POQ)

Least Unit Cost (LUC)

Least Total Cost (LTC)

Part Period Balancing (PPB)

Fixed Order Quantity (FOQ)

Specify a Number of Units arbitrarily to be ordered each time an order is placed for a particular item

Quantity may be arbitrary or EOQ

Safety Stock =80

Lead Time =2 Weeks

Week1 2 3 4 5 6 7 8

Gross Requirement 130 160 120 260 130 120 185 115

Scheduled Receipts

Projected available 370 240 80 460 200 570 450 265 150

Planned Receipts 500 500

Planned Order Release

500 500

Economic Order Quantity (EOQ)• A type of fixed order quantity that determines the

amount of an item to be purchased or made at one time• Goal= minimize the combined cost of ordering

(acquiring) and carrying inventory

• EOQ =√2D*CO /CH

• D= Annual demand for the item• Q = Order quantity • CO= Cost of order preparation or setup cost• CH=Inventory carrying cost per unit per year

Safety Stock =80

Lead Time =2 Weeks

Week1 2 3 4 5 6 7 8

Gross Requirement 130 160 120 260 130 120 185 115

Scheduled Receipts

Projected available 370 240 80 610 350 220 100 565 450

Planned Receipts 650 650

Planned Order Release

650 650

Avg. Demand=152.5/wk EOQ=√2CO D/CH = √2(10)(7,93) / 0.25 x 1.50=650

D=152`52 wks/yr =7,930

Lot-for-Lot (LFL)

Also called discrete order quantity. It generates planned orders in quantities equal to the net requirements in each period

No extra on–hand inventory used for perishable food items or items for which the market fluctuates widely

Safety Stock =80

Lead Time =2 Weeks

Week1 2 3 4 5 6 7 8

Gross Requirement

130 160 120 260 130 120 185 115

Scheduled Receipts

130 160

Projected available 80 80 80 80 80 80 80 80 80Planned Receipts 120 260 130 120 185 115Planned Order Release

120 260 130 120 185 115

Periods of Supply (POS)

Lot size will be equal to the net requirements for a given number of periods (e.g. weeks) into the future 

Safety Stock =80

Lead Time =2 Weeks

Week1 2 3 4 5 6 7 8

Gross Requirement

130 160 120 260 130 120 185 115

Scheduled ReceiptsProjected available

370 240 80 470 210 80 380 195 80

Planned Receipts 510 420Planned Order Release

510 420

Period order quantity (POQ)

Uses EOQ to calculate a fixed number of period requirements to include in each order

POQ = EOQ / Avg. Period Usages In case of fraction, round to the nearest number

 

order Quantity POQ Safety Stock =80

Lead Time =2 Weeks

Week1 2 3 4 5 6 7 8

Gross Requirement

130 160 120 260 130 120 185 115

Scheduled ReceiptsProjected available 370 240 80 590 330 200 80 ? ?Planned Receipts 630Planned Order Release

630

Avg Week Use = 152.5 :POQ =650/152.5 =4.26>>4

Example –POQ

Least Unit Cost (LUC)

A dynamic lot sizing technique that Adds ordering cost & Inventory carrying cost for

each trial lot sizeDivides by the numbers of units in the lot sizeThen Picking the lot size with the lowest unit cost

 

Carrying Cost

Future Reqmnt

In Period

Cum Order Qty

Excess Inv

Week Carried

Order Cost

This Period

Cum Cost

Total Cost

Unit Cost

120 3 120 0 0 10 0.00 0 10 0.083

260 4 380 260 1 10 1.88 1.88 11.88 0.031

130 5 510 130 2 10 1.88 3.75 13.75 0.027

120 6 630 120 3 10 2.60 6.35 16.35 0.026

185 7 815 185 4 10 5.34 11.68 21.68 0.027

115 8 930 115 5 10 4.15 15.83 25.83 0.028

Inventory carrying cost = (25%) ($1.50/52) =$0.007212/unit /wk

*=Carrying cost- (260) (0.007212) (1wk) = 1.875: (1.85) (0.007212) (4 Wks) =5.337 115)(0.007212) (5wks) =4.147

Safety Stock =80

Lead Time =2 Weeks

Week1 2 3 4 5 6 7 8

Gross Requirement

130 160 120 260 130 120 185 115

Scheduled ReceiptsProjected available 370 240 80 590 330 200 80 ? ?Planned Receipts 630Planned Order Release

630

Least Total Cost (LTC)

Dynamic lot sizing technique that calculates the order quantity by Comparing the carrying cost and the cost of ordering for various lot sizes

Selects the lot where these costs are most nearly equal

For dependent demand, total cost is discrete and the minimum total cost over the planning period usually occurs at the point closest to the balance of carrying cost & ordering costs.

Carrying Cost

Future Reqmnt

In Period

Cum Order Qty

Excess Inv

Week Carried

Order Cost

This Period

Cum Cost

Total Cost

120 3 120 0 0 10 0.00 0 10

260 4 380 260 1 10 1.88 1.88 11.88

130 5 510 130 2 10 1.88 3.75 13.75

120 6 630 120 3 10 2.60 6.35 16.35

185 7 815 185 4 10 5.34 11.68 21.68

115 8 930 115 5 10 4.15 15.83 25.83

Safety Stock =80

Lead Time =2 Weeks

Week1 2 3 4 5 6 7 8

Gross Requirement

130 160 120 260 130 120 185 115

Scheduled ReceiptsProjected available 370 240 80 775 515 385 265 80 ?Planned Receipts 815 ?Planned Order Release

815 ?

Part Period Balancing (PPB)Variation of LTC With Look Ahead/ look back StepsCompute the economic part period (EPP)

EPP= (Ordering cost) / Caring cost / unit /period)

Example: EPP= 10/0.0072=1389Add requirements period by period until the generated part

periods approximate the EPPPart Periods: Number of units of inventory held for a period.

 

Part PeriodFuture Reqmnt

In Period Cum Order Qty

Excess Inv

Week Carried

This Period Cum Cost

120 3 120 0 0 0 0

260 4 380 260 1 260 260

130 5 510 130 2 260 520

120 6 630 120 3 360 880

185 7 815 185 4 740 1620

115 8 930 115 5 575 2195

Safety Stock =80

Lead Time =2 Weeks

Week1 2 3 4 5 6 7 8

Gross Requirement

130 160 120 260 130 120 185 115

Scheduled ReceiptsProjected available 370 240 80 775 515 385 265 80 ?Planned Receipts 815 ?Planned Order Release

815 ?