LOT SIZING

Lot Sizing
• Reduce Costs (Inventory, Setup).

• Ensures Adequate level of raw material is available in the

inventory.

• Helps to plan the manufacturing and purchasing activities.

• Meeting the demand in a timely manner.

• Managing Capacity.
LOT SIZING TECHNIQUES
• Lot for Lot
• Bulk
• EOQ • Fixed Order Quantity
• POQ • Fixed Period Quantity
• Min-Max system
• Part Period Balancing (PPB)
• Least Unit Cost
• Silver Meal (Minimum Cost per Period)
• Wagner-Whitin algorithm
• Least Total Cost
• McLaren Order Moment (MOM)
• Groff’s algorithm
Similar but lack systematic
• Freeland & Colley method
economic calculations.
• Chung et al. Based on human judgment
• Discount order quantity
 Lot for Lot
Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 0 0 0 0 0 0 0 0
Net Requirement 0 30 40 0 10 40 30 0 30 55
Planned Order Receipt 30 40 10 40 30 30 55
Planned Order Release 30 40 10 40 30 30 55

Holding Cost = $1 per week/unit

Setup cost = $100 per setup
Total Cost = Setups + holding Lead Time =1 week
Setups = 7 costing $700
Holding = 0
 Bulk
Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 205 165 165 155 115 85 85 55

Net Requirement 0 30 0 0 0 0 0 0 0 0
Planned Order Receipt 235
Planned Order Release 235

Holding Cost = $1 per week/unit

Setup cost = $100 per setup
Total Cost = Setups + holding Lead Time =1 week
Setups = 1 costing $100
Holding = 1030 x $1 = $1030
TOTAL= $1130
 EOQ Economic Order Quantity
2𝐷𝑆
𝑄∗ =
𝐻

Total Cost = Setups + holding

Setups = 4 costing $400
Holding = 318 x $1 = $318 2 × 1404 × 100
TOTAL= $718 𝑄∗ = ≅ 73
52

Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 43 3 3 66 26 69 69 39
Net Requirement 0 30 0 0 7 0 4 0 0 16
Planned Order Receipt 73 73 73 73
Planned Order Release 73 73 73 73
 POQ Periodic Order Quantity

POQ = EOQ
d
Where d = D average demand or demand rate
Total Cost = Setups + holding
52
Setups = 3 costing $300
From previous example POQ = 73 = 2.7 ≈ 3
Holding = 280 x $1 = $280
27
TOTAL= $580

Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 40 0 0 70 30 0 85 55
Net Requirement 0 30 0 0 10 0 0 0 0 0
Planned Order Receipt 70 80 85
Planned Order Release 70 80 85
 PPB 𝑇
Economic Part Period = Setup = 100
Part Period Balancing
𝑆 = ℎ ෍ 𝑘 − 1 𝐷𝑘 Holding Cost
𝑘=1 Where
Setup = cost of 1 setup
Select part periods that are closest to the EPP value Holding Cost = Cost per unit per week

Total Lot Costs ($)

Periods Combined Part Periods ($)
Size Setup Holding Total
2 30 0 100 0 100
2,3 70 40x1 100 40 140
2,3,4 70 40x1 + 0x2 100 40 140
2,3,4,5 80 40x1 + 0x2 + 10x3 100 70 170
2,3,4,5,6 120 40x1 + 0x2 +10x3 + 40x4 100 230 330
Select 2-5. Part period of $70, for periods 2-5 is as close to EPP as we can get
6 40 0 100 0 100
6,7 70 30x1 100 30 130
6,7,8 70 30x1 + 0x2 100 30 130
6,7,8,9 100 30x1 + 0x2 + 30x3 100 120 220
Select 6-9. Part period of $120, for periods 6-9 is as close to EPP as we can get
10 55 0 100 0 100
 PPB Part Period Balancing

Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 50 10 10 0 60 30 30 0
Net Requirement 0 30 0 0 0 40 0 0 0 55
Planned Order Receipt 80 100 55
Planned Order Release 80 100 55

Total Cost = Setups + holding

Setups = 3 costing $300
Holding = $190
TOTAL= $ 490
 Least Unit Cost
Select that cost where
𝑆 + ℎ σ𝑇𝑘=1 𝑘 − 1 𝐷𝑘
Total Cost Per unit =
per unit cost is lowest
σ𝑇𝑘=1 𝐷𝑘
Periods Total Lot Costs ($) Cost per unit =
Part Periods ($)
Combined Size Setup Holding Total Total/lot size
2 30 0 100 0 100 3.33
2,3 70 40x1 100 40 140 2
2,3,4 70 40x1 + 0x2 100 40 140 2
2,3,4,5 80 40x1 + 0x2 + 10x3 100 70 170 2.125
Select 2-4. Cost per unit starts exceeding beyond periods 2-4
5 10 0 100 0 100 10
5,6 50 40x1 100 40 140 2.8
5,6,7 80 40x1 + 30x2 100 100 200 2.5
5,6,7,8 80 40x1 + 30x2 + 0x3 100 100 200 2.5
5,6,7,8,9 110 40x1 + 30x2 + 0x3 + 30x4 100 220 320 2.9
Select 5-8. Cost per unit starts exceeding beyond periods 5-8
9 30 0 100 0 100 3.33
9,10 85 55x1 100 55 155 1.82
 Least Unit Cost

Total Cost = Setups + holding

Setups = 3 costing $300
Holding = 195 x $1 = $195
TOTAL= $495

Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 40 0 0 70 30 0 0 55
Net Requirement 0 30 0 0 10 0 0 0 30 0
Planned Order Receipt 70 80 85
Planned Order Release 70 80 85
 Silver Meal Algorithm (Minimum Cost per Period)

𝑆 + ℎ σ𝑇𝑘=1 𝑘 − 1 𝐷𝑘
Select that cost where Cost Per Period =
per unit cost is lowest
σ𝑇𝑘=1 𝑇𝑘
Periods Total Lot Costs ($) Cost per period =
Combined T Size
Part Periods ($)
Setup Holding Total Total cost / periods
2 1 30 0 100 0 100 100
2,3 2 70 40x1 100 40 140 70
2,3,4 3 70 40x1 + 0x2 100 40 140 46.66
2,3,4,5 4 80 40x1 + 0x2 + 10x3 100 70 170 42.5
2,3,4,5,6 5 120 40x1 + 0x2 + 10x3 + 40x4 100 230 330 66
Select 2-5. Cost per period starts exceeding beyond periods 2-5
6 1 40 0 100 0 100 100
6,7 2 70 30x1 100 30 130 65
6,7,8 3 70 30x1 + 0x2 100 30 130 43.33
6,7,8,9 4 100 30x1 + 0x2 + 30x3 100 120 220 55
Select 6-8. Cost per period starts exceeding beyond periods 6-8
9 1 30 0 100 0 100 100
9,10 2 85 55x1 100 55 155 77.5
 Silver Meal Algorithm

Total Cost = Setups + holding

Setups = 3 costing $300
Holding = 155 x $1 = $155
TOTAL= $455

Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 50 10 10 0 30 0 0 55
Net Requirement 0 30 0 0 0 40 0 0 30 0
Planned Order Receipt 80 70 85
Planned Order Release 80 70 85
Wagner-Whitin Algorithm
• Total cost (Zce ) = S + ℎ σ𝑒𝑖=𝑐(𝑄𝑐𝑒 − 𝑄𝑐𝑖 ) for 1 ≤ c ≤ e ≤ N

• Zce = It is the total cost of periods, from

period c to period e

• S = Setup Cost

• ℎ σ𝑒𝑖=𝑐(𝑄𝑐𝑒 − 𝑄𝑐𝑖 ) = Holding cost for the periods.

• Qce = Total demand in periods from

period c to period e
• 𝑓𝑒 = Min(Zce + 𝑓𝑐−1 ) = Minimum possible cost from period 1 to e
Step 1
Total Variable Cost table (Zce)
c e=1 2 3 4 5 6 7 8 9 10
1
2 100 140 140 170 330 480 480 690 1130
3 100 100 120 240 360 360 540 925
4 100 110 190 280 280 430 760
5 100 140 200 200 320 595
6 100 130 130 220 440
7 100 100 160 325
8 100 130 240
9 100 155
10 100
Step 2 Minimum possible cost from period 1 to e, fe
Total Variable Cost table (Zce) and( 𝑓𝑒 )
c e=1 2 3 4 5 6 7 8 9 10
1
2 100 140 140 170 330 480 480 690 1130
3 200 200 220 340 460 460 640 1025
4 240 250 330 420 420 570 900
5 240 280 340 340 460 735
6 270 300 300 390 610
7 370 370 430 595
8 400 430 540
9 400 455
10 490
𝑓𝑒 100 140 140 170 270 300 300 390 455
Step 3 period selection
Total Variable Cost table (Zce) and( 𝑓𝑒 )
c e=1 2 3 4 5 6 7 8 9 10
1
2 100 140 140 170 330 480 480 690 1130
3 200 200 220 340 460 460 640 1025
4 240 250 330 420 420 570 900
5 240 280 340 340 460 735
6 270 300 300 390 610
7 370 370 430 595
8 400 430 540
9 400 455
10 490
𝑓𝑒 100 140 140 170 270 300 300 390 455
 Wagner-Whitin Algorithm

Total Cost = Setups + holding

Setups = 3 costing $300
Holding = 155 x $1 = $155
TOTAL= $455

Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 50 10 10 0 30 0 0 55
Net Requirement 0 30 0 0 0 40 0 0 30 0
Planned Order Receipt 80 70 85
Planned Order Release 80 70 85
Least Total Cost
• Stop when cumulative carrying cost exceeds Setup Cost.
Setup cost = $100
Least Total Cost
Total Lot Costs ($)
Periods Combined Part Periods ($) Holding cost > setup
Size Setup Holding
2 30 0 100 0 No
2,3 70 40x1 100 40 No
2,3,4 70 40x1 + 0x2 100 40 No
2,3,4,5 80 40x1 + 0x2 + 10x3 100 70 No
2,3,4,5,6 120 40x1 + 0x2 +10x3 + 40x4 100 230 Yes
Select 2-5. Holding cost of $230, for periods 2-6 exceeds setup cost of 100
6 40 0 100 0 No
6,7 70 30x1 100 30 No
6,7,8 70 30x1 + 0x2 100 30 No
6,7,8,9 100 30x1 + 0x2 + 30x3 100 120 Yes
Select 6-8. Holding cost of $120, for periods 6-9 exceeds setup cost of 100
9 30 0 100 0 No
9,10 85 55x1 100 55 No
 Least Total Cost

Total Cost = Setups + holding

Setups = 3 costing $300
Holding = 155 x $1 = $155
TOTAL= $455

Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 50 10 10 0 30 0 0 55
Net Requirement 0 30 0 0 0 40 0 0 30 0
Planned Order Receipt 80 70 85
Planned Order Release 80 70 85
 McLaren Order Moment (MOM)
• Involves two tests,
• TEST 1: Stop before accumulated part periods exceeds OMT
• TEST 2: Conducted to ascertain if another period can be
added or not, If 2nd condition holds true add that period as
well
∗
1st test 𝑂𝑀𝑇 = 𝑑 σ𝑇𝑡=1
−1
𝑡 + TBO − 𝑇 ∗ 𝑇 ∗
2nd test ℎ 𝑘 𝐷𝑡 ≤ 𝑆

SOLUTION
OMT = Order Moment Target
OMT = d[t+(TBO-T*)T*] d = Average requirement per period
d = 1404 (yearly Demand)/52 = 27 TBO = EOQ/d = Time between periods
TBO = EOQ /d= 73/27 = 2.7 = POQ without rounding
T* = 2
T* = Largest integer less than or equal to TBO
OMT = 27[1+(2.74-2)2] = 67
 McLaren Order Moment (MOM)
Periods Total Lot Costs ($) TEST 1
Combined Dt k Size
Part Periods ($)
Setup Holding Part period > OMT

2 30 1 30 0 100 0 No
2,3 40 2 70 40x1 100 40 No
2,3,4 0 3 70 40x1 + 0x2 100 40 No
2,3,4,5 10 4 80 40x1 + 0x2 + 10x3 100 70 Yes
1st Test: Part Period of 70, exceeds OMT of 67, so we may decide to batch 2-4.
2nd Test: if h(k)(Dt)<S 1 x 4 x 10= 40≤100? Yes Hence we will include period 5
6 40 1 40 0 100 0 No
6,7 30 2 70 30x1 100 30 No
6,7,8 0 3 70 30x1 + 0x2 100 30 No
6,7,8,9 30 4 100 30x1 + 0x2 + 30x3 100 120 Yes
1st Test: Part Period of 120 exceeds OMT of 67, so we may decide to batch 6-8
2nd Test: if h(k)(Dt)<S 1 x 4 x 30= 120≤100? No Hence we will exclude period 9
9 30 1 30 0 100 0 No
9,10 55 2 85 55 x 1 100 55 No
 McLaren Order Moment (MOM)

Total Cost = Setups + holding

Setups = 3 costing $300
Holding = 155 x $1 = $155
TOTAL= $455

Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 50 10 10 0 30 0 0 55
Net Requirement 0 30 0 0 0 40 0 0 30 0
Planned Order Receipt 80 70 85
Planned Order Release 80 70 85
Groff’s Algorithm
• Similar to MOM, however it considers the addition of a
future demand in the lot
• Select the periods meeting the following condition only

2𝑆
𝑛 𝑛 − 1 𝐷𝑡 ≤
ℎ

2𝑆
=200
S= 100 , h=1 ℎ
Dt = demand of that period
n = number of the periods carried
 Groff’s Algorithm
Periods
# of period Dt n (n-1) Dt ≤ 200?
Combined
2 0 30 0(0-1)30=0 Yes
2,3 1 40 1(1-1)40=0 Yes
2,3,4 2 0 2(2-1)0=0 Yes
2,3,4,5 3 10 3(3-1)10=60 Yes
2,3,4,5,6 4 40 4(4-1)40=480 No
Do not include period 6 demand in the lot.
6 0 40 0(0-1)40=0 Yes
6,7 1 30 1(1-1)30=0 Yes
6,7,8 2 0 2(2-1)0=0 Yes
6,7,8,9 3 30 3(3-1)30=180 Yes
6,7,8,9,10 4 55 4(4-1)55=660 No
Do not include period 10 in the lot.
10 0 55 0(0-1)55=0 Yes
End of the horizon. The lot in period 10 will be 555.
 Groff’s Algorithm
Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 50 10 10 0 60 30 30 0
Net Requirement 0 30 0 0 0 40 0 0 0 55
Planned Order Receipt 80 100 55
Planned Order Release 80 100 55

Total Cost = Setups + holding

Setups = 3 costing $300
Holding = $190
TOTAL= $ 490
Freeland & Colley method
• Similar to the 2nd condition of MOM
• ℎ 𝑡 𝐷𝑡 > 𝑆
• Select the periods before the value exceeds S
 Freeland & Colley method
Periods
Combined
# of period Demand h(t)Dt > S?
2 0 30 1(0)30=0 No
2,3 1 40 1(1)40=40 No
2,3,4 2 0 1(2)0=0 No
2,3,4,5 3 10 1(3)10=30 No
2,3,4,5,6 4 40 1(4)40=160 Yes
Do not include period 6 demand. The lot in period 2 will be 80.
6 0 40 1(0)40=0 No
6,7 1 30 1(1)30=30 No
6,7,8 2 0 1(2)0=0 No
6,7,8,9 3 30 1(3)30=90 No
6,7,8,9,10 4 55 1(4)55=220 Yes
Do not include period 10 demand. The lot in period 6 will be 100.
10 0 55 1(0)55=0 No
End of the horizon. The lot in period 10 will be 55.
 Freeland & Colley method
Period 1 2 3 4 5 6 7 8 9 10
Gross requirement 35 30 40 0 10 40 30 0 30 55
Scheduled Receipt

On hand 35 35 0 50 10 10 0 60 30 30 0
Net Requirement 0 30 0 0 0 40 0 0 0 55
Planned Order Receipt 80 100 55
Planned Order Release 80 100 55

Total Cost = Setups + holding

Setups = 3 costing $300
Holding = $190
TOTAL= $ 490
 Cost Comparison

Lot sizing Approaches Cost($)

Lot for Lot 700
Bulk 1130
EOQ 718,730
POQ 580
Part Period Balancing 490
Least Unit Cost 490
Silver Meal 455
Wagner-Whitin 455
Mclaren's Order 455
Least Total Cost 455
Groff's Approach 490
Freeland and Colley 490