LESSON 22: MATERIAL REQUIREMENTS

PLANNING: LOT SIZING

Outline
Lot Sizing
Lot Sizing Methods
Lot-for-Lot (L4L)
EOQ
Silver-Meal Heuristic
Least Unit Cost (LUC)
Part Period Balancing
1

Lot-Sizing
In Lesson 21
We employ lot for lot ordering policy and order
production as much as it is needed.
Exception are only the cases in which there are
constraints on the order quantity.
For example, in one case we assume that at least 50
units must be ordered. In another case we assume that
the order quantity must be a multiple of 50.
The motivation behind using lot for lot policy is minimizing
inventory. If we order as much as it is needed, there will
be no ending inventory at all!

Lot-Sizing
However, lot for lot policy requires that an order be placed
each period. So, the number of orders and ordering cost
are maximum.
So, if the ordering cost is significant, one may naturally try
to combine some lots into one in order to reduce the
ordering cost. But then, inventory holding cost increases.
Therefore, a question is what is the optimal size of the lot?
How many periods will be covered by the first order, the
second order, and so on until all the periods in the
planning horizon are covered. This is the question of lot
sizing. The next slide contains the statement of the lot
sizing problem.

Lot-Sizing
The lot sizing problem is as follows: Given net
requirements of an item over the next T periods, T >0, find
order quantities that minimize the total holding and
ordering costs over T periods.
Note that this is a case of deterministic demand. However,
the methods learnt in Lessons 11-15 are not appropriate
because
the demand is not necessarily the same over all
periods and
the inventory holding cost is only charged on ending
inventory of each period

Lot-Sizing
Although we consider a deterministic model, keep in mind
that in reality the demand is uncertain and subject to
change.
It has been observed that an optimal solution to the
deterministic model may actually yield higher cost
because of the changes in the demand. Some heuristic
methods give lower cost in the long run.
If the demand and/or costs change, the optimal solution
may change significantly causing some managerial
problems. The heuristic methods may not require such
changes in the production plan.
The heuristic methods require fewer computation steps
and are easier to understand.
In this lesson we shall discuss some heuristic methods.
The optimization method is discussed in the text,
Appendix 7-A, pp 406-410 (not included in the course). 5

Lot-Sizing
Some heuristic methods:
Lot-for-Lot (L4L):
Order as much as it is needed.
L4Lminimizes inventory holding cost, but maximizes
ordering cost.
EOQ:
Every time it is required to place an order, lot size
equals EOQ.
EOQ method may choose an order size that covers
partial demand of a period. For example, suppose
that EOQ is 15 units. If the demand is 12 units in
period 1 and 10 units in period 2, then a lot size of
15 units covers all of period 1 and only (15-12)=3
units of period 2. So, one does not save the
ordering cost of period 2, but carries some 3 units in
6

Lot-Sizing
Some heuristic methods:
the inventory when that 3 units are required in period
2. This is not a good idea because if an order size of
12 units is chosen, one saves on the holding cost
without increasing the ordering cost!
So, whats the mistake? Generally, if the order quantity
covers a period partially, one can save on the holding
cost without increasing the ordering cost. The next
three methods, Silver-Meal heuristic, least unit cost
and part period balancing avoid order quantities that
cover a period partially. These methods always
choose an order quantity that covers some K periods,
K >0.
Be careful when you compute EOQ. Express both
holding cost and demand over the same period. If the
holding cost is annual, use annual demand. If the
holding cost is weekly, use weekly demand.
7

Lot-Sizing
Some heuristic methods:
Silver-Meal Heuristic
As it is discussed in the previous slide, Silver-Meal
heuristic chooses a lot size that equals the demand
of some K periods in future, where K>0.
If K =1, the lot size equals the demand of the next
period.
If K =2, the lot size equals the demand of the next 2
periods.
If K =3, the lot size equals the demand of the next 3
periods, and so on.
The average holding and ordering cost per period is
computed for each K=1, 2, 3, etc. starting from K=1
and increasing K by 1 until the average cost per
period starts increasing. The best K is the last one
up to which the average cost per period decreases.
8

Lot-Sizing
Some heuristic methods:
Least Unit Cost (LUC)
As it is discussed before, least unit cost heuristic
chooses a lot size that equals the demand of some
K periods in future, where K>0.
The average holding and ordering cost per unit is
computed for each K=1, 2, 3, etc. starting from K=1
and increasing K by 1 until the average cost per unit
starts increasing. The best K is the last one up to
which the average cost per unit decreases.
Observe how similar is Silver-Meal heuristic and
least unit cost heuristic. The only difference is that
Silver-Meal heuristic chooses K on the basis of
average cost per period and least unit cost on
average cost per unit.
9

Lot-Sizing
Some heuristic methods:
Part Period Balancing
As it is discussed before, part period balancing
heuristic chooses a lot size that equals the demand
of some K periods in future, where K>0.
Holding and ordering costs are computed for each
K=1, 2, 3, etc. starting from K=1 and increasing K
by 1 until the holding cost exceeds the ordering
cost. The best K is the one that minimizes the
(absolute) difference between the holding and
ordering costs.
Note the similarity of this method with the SilverMeal heuristic and least unit cost heuristic. Part
period balancing heuristic chooses K on the basis of
the (absolute) difference between the holding and
ordering costs.
10

Lot-Sizing
Some important notes
Inventory costs are computed on the ending inventory.
L4L minimizes carrying cost
Silver-Meal Heuristic, LUC and Part Period Balancing
are similar
Silver-Meal Heuristic and LUC perform best if the costs
change over time
Part Period Balancing perform best if the costs do not
change over time
The problem extended to all items is difficult to solve

11

Lot-Sizing
Example 2: The MRP gross requirements for Item A are
shown here for the next 10 weeks. Lead time for A is three
weeks and setup cost is $10. There is a carrying cost of
$0.01 per unit per week. Beginning inventory is 90 units.
Week
1
2
3
4
5

Gross requirements Week

30
6
50
7
10
8
20
9
70
10

Gross requirements
80
20
60
200
50

Determine the lot sizes.

12

Lot-Sizing: Lot-for-Lot
Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Use the above table to compute ending inventory of various periods.
13

Lot-Sizing: Lot-for-Lot
Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net
20
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Week 4 net requirement = 20 > 0. So, an order is required.
14

Lot-Sizing: Lot-for-Lot
Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net
20
Requirements
Planned order
20
Release
Planned
20
Deliveries
Ending
60 10 0
Inventory
A delivery of 20 units is planned for the 4th period..
15

Lot-Sizing: Lot-for-Lot

Exercise

Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0 0
Inventory
Net
0 0 0 20 70
Requirements
Time-phased Net
20
Requirements
Planned order
20
Release
Planned
20
Deliveries
Ending
60 10 0 0
Inventory
The net requirement of the 5th period is 70 periods.
16

Lot-Sizing: EOQ
First, compute EOQ
Annual demand is not given. Annual demand is
estimated from the known demand of 10 weeks.
Estimated annual demand,
Total demand over 10 weeks

52 weeks/yea r
10
30 50 10 20 70 80 20 60 200 50

52
10
590

52
10
3,068 units/year
Compute annual holding cost per unit
h $0.01/unit/week $0.52/unit /year

17

Lot-Sizing: EOQ
First, compute EOQ
3,068 units/year
K $10 /order
h $0.52 /unit/year
2 K
2 10 3,068
EOQ

343.51 344 units

h
0.52
Therefore, whenever it will be necessary to place an
order, the order size will be 344 units. This will now be
shown in more detail.

18

Lot-Sizing: EOQ
Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Use the above table to compute ending inventory of various periods.
19

Lot-Sizing: EOQ
Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net 20
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Week 4 net requirement = 20 > 0. So, an order is required.
20

Lot-Sizing: EOQ
Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net 20
Requirements
Planned order
344
Release
Planned
344
Deliveries
Ending
60 10 0
Inventory
Order size = EOQ = 344, whenever it is required to place an order.
21

Lot-Sizing: EOQ

Exercise

Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0 324
Inventory
Net
0 0 0 20
Requirements
Time-phased Net 20
Requirements
Planned order
344
Release
Planned
344
Deliveries
Ending
60 10 0 324
Inventory
Week 5 b. inv=344-20=324>70= gross req. So, no order is required.
22

Lot-Sizing: Silver-Meal-Heuristic
j
rj
Order for weeks
1 week, week 4
2 weeks, weeks 4 to 5
3 weeks, weeks 4 to 6
4 weeks, weeks 4 to 7
5 weeks, weeks 4 to 8
6 weeks, weeks 4 to 9
7 weeks, weeks 4 to 10

1
2
3
4
5
6
7
20 70 80 20
60 200 50
Units in the inventory at the end of Week
Q
4
5
6
7
8
9 10

Per
H. Ord. Period
Cost Cost Cost

The order is placed for K periods, for some K>0. Use the above table
to find K.
23

Lot-Sizing: Silver-Meal-Heuristic
j
rj
Order for weeks
1 week, week 4
2 weeks, weeks 4 to 5
3 weeks, weeks 4 to 6
4 weeks, weeks 4 to 7
5 weeks, weeks 4 to 8
6 weeks, weeks 4 to 9
7 weeks, weeks 4 to 10

1
2
3
4
5
6
7
20 70 80 20
60 200 50
Units in the inventory at the end of Week
Q
4
5
6
7
8
9 10

20

Per
H. Ord. Period
Cost Cost Cost

0.00 10 10.0

If K=1, order is placed for 1 week and the order size = 20. Then, the
ending inventory = inventory holding cost =0. The order cost = $10.
24
Average cost per period = (0+10)/1=$10.

Lot-Sizing: Silver-Meal-Heuristic
j
rj
Order for weeks
1 week, week 4
2 weeks, weeks 4 to 5
3 weeks, weeks 4 to 6
4 weeks, weeks 4 to 7
5 weeks, weeks 4 to 8
6 weeks, weeks 4 to 9
7 weeks, weeks 4 to 10

Exercise
1
2
3
4
5
6
7
20 70 80 20
60 200 50
Units in the inventory at the end of Week
Q
4
5
6
7
8
9 10

20
90 70

Per
H. Ord. Period
Cost Cost Cost

0.00 10 10.0
0.70 10 5.35

If K=2, order is placed for 2 weeks and the order size = 20+70=90.
Then, inventory at the end of week 4 = 90-20=70 and holding cost
=70 0.01. = 0.70. Average cost per period = (0.70+10)/2=$5.35.25

Lot-Sizing: Silver-Meal-Heuristic
Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Use the above table to compute ending inventory of various periods.
26

Lot-Sizing: Silver-Meal-Heuristic
Exercise

Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net 20
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Week 4 net requirement = 20 > 0. So, an order is required.
27

Lot-Sizing: Least Unit Cost

j
rj
Order for weeks
1 week, week 4
2 weeks, weeks 4 to 5
3 weeks, weeks 4 to 6
4 weeks, weeks 4 to 7
5 weeks, weeks 4 to 8
6 weeks, weeks 4 to 9
7 weeks, weeks 4 to 10

1
2
3
4
5
6
7
20 70 80 20
60 200 50
Units in the inventory at the end of Week
Q
4
5
6
7
8
9 10

H. Ord. Unit
Cost Cost Cost

The order is placed for K periods, for some K>0. Use the above table
to find K.
28

Lot-Sizing: Least Unit Cost

j
rj
Order for weeks
1 week, week 4
2 weeks, weeks 4 to 5
3 weeks, weeks 4 to 6
4 weeks, weeks 4 to 7
5 weeks, weeks 4 to 8
6 weeks, weeks 4 to 9
7 weeks, weeks 4 to 10

1
2
3
4
5
6
7
20 70 80 20
60 200 50
Units in the inventory at the end of Week
Q
4
5
6
7
8
9 10

20

H. Ord. Unit
Cost Cost Cost

0.00 10 .500

If K=1, order is placed for 1 week and the order size = 20. Then, the
ending inventory = inventory holding cost =0. The order cost = $10.
29
Average cost per unit = (0+10)/20=$0.50

Lot-Sizing: Least Unit Cost

Exercise
j
rj
Order for weeks
1 week, week 4
2 weeks, weeks 4 to 5
3 weeks, weeks 4 to 6
4 weeks, weeks 4 to 7
5 weeks, weeks 4 to 8
6 weeks, weeks 4 to 9
7 weeks, weeks 4 to 10

1
2
3
4
5
6
7
20 70 80 20
60 200 50
Units in the inventory at the end of Week
Q
4
5
6
7
8
9 10

20
90 70

H. Ord. Unit
Cost Cost Cost

0.00 10 .500
0.70 10 .119

If K=2, order is placed for 2 weeks and the order size = 20+70=90.
Then, inventory at the end of week 4 = 90-20=70 and holding cost
=70 0.01. = 0.70. Average cost per unit = (0.70+10)/90=$0.119.30

Lot-Sizing: Least Unit Cost

Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Use the above table to compute ending inventory of various periods.
31

Lot-Sizing: Least Unit Cost

Exercise

Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net 20
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Week 4 net requirement = 20 > 0. So, an order is required.
32

Lot-Sizing: Part Period Balancing

j
rj
Order for weeks
1 week, week 4
2 weeks, weeks 4 to 5
3 weeks, weeks 4 to 6
4 weeks, weeks 4 to 7
5 weeks, weeks 4 to 8
6 weeks, weeks 4 to 9
7 weeks, weeks 4 to 10

1
2
3
4
5
6
7
20 70
80 20 60 200 50
Units in the inventory at the end of Week
Q
4
5
6
7
8
9 10

H. Ord.
Cost Cost

The order is placed for K periods, for some K>0. Use the above table
to find K.
33

Diff

Lot-Sizing: Part Period Balancing

j
rj

1
2
3
4
5
6
7
20 70
80 20 60 200 50
Units in the inventory at the end of Week
Q
4
5
6
7
8
9 10

Order for weeks

1 week, week 4
2 weeks, weeks 4 to 5
3 weeks, weeks 4 to 6
4 weeks, weeks 4 to 7
5 weeks, weeks 4 to 8
6 weeks, weeks 4 to 9
7 weeks, weeks 4 to 10

20
90
170
190
250
450

1 week, week 9
2 weeks, weeks 9 to 10

200
250

70
150 80
170 100 20
230 160 80 60
430 360 280 260 200
NOT COMPUTED
50

H. Ord.
Cost Cost

0.00
0.70
2.30
2.90
5.30
15.30

10
10
10
10
10
10

Diff

10.0
9.30
7.70
7.10
4.70
5.30

0.00 10 10.0
0.50 10 9.50

The above computation is similar to that of the Silver-Meal heuristic.

The primary difference is that the (absolute) difference between
34
holding and ordering cost is shown in the last column.

Lot-Sizing: Part Period Balancing

Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0
Inventory
Net
0 0 0 20
Requirements
Time-phased Net
Requirements
Planned order
Release
Planned
Deliveries
Ending
60 10 0
Inventory
Use the above table to compute ending inventory of various periods.
35

Lot-Sizing: Part Period Balancing

Period
1 2 3 4 5 6 7 8 9 10
Gross
30 50 10 20 70 80 20 60 200 50
Requirements
Beginning
90 60 10 0 230 160 80 60 0 50
Inventory
Net
0 0 0 20
200
Requirements
Time-phased Net 20
200
Requirements
Planned order
250
250
Release
Planned
250
250
Deliveries
Ending
60 10 0 230 160 80 60 0 50 0
Inventory
The computation is similar to that of the Silver-Meal heuristic. 36

Cost Comparison
Lot-for-Lot
See the last slide entitled lot-sizing: lot-for-lot
Number of orders: 7
Ordering cost = 7 $10/order = $70
Holding cost = (60+10) $0.01/unit/week = $0.70
Total cost = 70+0.70 =$70.70
EOQ
See the last slide entitled lot-sizing: EOQ
Number of orders: 2
Ordering cost = 2 $10/order = $20
Holding cost = (60 +10 +324 +254 +174 +154 +94
+237 +187) $0.01/unit/week = $14.94
Total cost = 20+14.94 =$34.94
37

Cost Comparison
Silver-Meal Heuristic
See the last slide entitled lot-sizing: Silver-Meal
heuristic
Number of orders: 2
Ordering cost = 2 $10/order = $20
Holding cost = (60 +10 +230 +160 +80 +60 +50)
$0.01/unit/week = $6.50
Total cost = 20+6.50 =$26.50
Least Unit Cost
See the last slide entitled lot-sizing: least unit cost
Number of orders: 2
Ordering cost = 2 $10/order = $20
Holding cost = (60 +10 +430 +360 +280 +260 +200)
$0.01/unit/week = $16.00
Total cost = 20+16.00 =$36.00
38

Cost Comparison
Part-Period Balancing
See the last slide entitled lot-sizing: part-period
balancing
Number of orders: 2
Ordering cost = 2 $10/order = $20
Holding cost = (60 +10 +230 +160 +80 +60 +50)
$0.01/unit/week = $6.50
Total cost = 20+6.50 =$26.50
Conclusion: In this particular case, Silver-Meal heuristic
and part period balancing yield the least total holding and
ordering cost of $26.50 over the planning period of 10
weeks.
39

READING AND EXERCISES

Lesson 22
Reading:
Section 7.2-7.3 pp. 366-375 (4th Ed.), pp. 358-366 (5th
Ed.)
Exercise:
17 and 25 pp. 371-373, 375 (4th Ed.), pp. 363, 366

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