Material Requirements Planning:

Lot Sizing

IE 503: Operations Analysis

Jayendran Venkateswaran
IE & OR
 Materials Requirements Planning
MRP is a process
1) Netting:
• Net requirements = Gross requirements – OnHand inventory –
Scheduled Receipts
• Gross Requirements for Level 0 item → come from MPS
2) Lot Sizing:
l Divide time phased netted requirements into lot sizes to form jobs
3) Time phasing:
l Offset net requirements with lead times
4) BOM Explosion:
l Use start times, lot sizes, & BOM to generate gross requirements
for next level(s)
5) Iterate:
l Repeat steps until all levels are processed
 Lot Sizing Decision
• A key decision is to decide what is the order release
quantity (or job size or lot size) in the shop floor

• What production quantities will minimize the total

holding and setup costs over the planning horizon?
– Setup cost, K vs. Inventory holding cost, h.
– Setup Costs: Cost of (non-value added) activities required
before the actual production can begin.
– Inventory holding cost: Cost of holding the inventory from
one period to the next. Includes opportunity costs too.

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 Example (Costs)
• Suppose a company assembles a product. The lead
time is one week.
• The setup operation for the machinery takes 2 workers
about 1.5 hours. The workers average Rs.44 per hour.
• The company uses a holding cost based on 20
percent annual interest rate. Each product-unit costs
the company Rs.156 in materials and value added
labor.
• Compute
– The setup cost.
– The inventory holding cost per unit per week

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 Example, Cost of LFL
• Suppose the net requirements of an assembled product is
as shown in table below. Lead time is 1 week.
• The planned order receipts, end inventory, planned order
releases are also shown.
Week 1 2 3 4 5 6 7 8
Net requirements 0 5 10 50 40 30 35 30
Planned order receipts 5 10 50 40 30 35 30
Ending Inventory 0 0 0 0 0 0 0
Planned Order Releases 5 10 50 40 30 35 30

• Assume a basic policy, Lot-for-Lot (LFL) policy

– Produce in period t the net requirements for period t.
• Compute the total cost (setup and holding cost).

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 Another Lot sizing rule we have seen
• Fixed Order Period (FOP)
– The quantity produced in period t is the sum of net
requirements for periods t, t+1, …, t+P-1, where P is the
parameter of the policy
– If P=1, the this is same as LFL
– NOTE: Policy does NOT state that production will occur
every P periods.

• In the example, suppose we use FOP lot sizing rule

with P=2.
– What are the resulting MRP calculations, what will the
total cost?

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 Part Period Balancing approach to find lot size
• The method is to set the order horizon equal to the
number of periods that most closely matches the total
holding cost with the setup cost over that period.
• The order horizon that exactly equates holding costs
and setup costs will rarely be an integer number of
periods.
– Hence the name of the method

• Use Part Period Balancing approach to find lot sizes,

& perform the MRP calculations. What will the total
cost?

IEOR @ IITBombay IE503: Operations Analysis

 A New Lot sizing rule
• Economic Order Quantity
– Since the tradeoff is between setup cost and holding cost,
we can use EOQ
– EOQ Formula
• As discussed, in Inventory Control

• In the example, suppose we use EOQ lot sizing

rule.
– What are the resulting MRP calculations, what will the
total cost?

IEOR @ IITBombay IE503: Operations Analysis

 Silver-Meal Heuristic to determine lot size
A forward method based on average cost per period of the
planned order.
• C(T): Average holding & setup cost per period if current
order spans the next T periods.
• Let (r1, r2, …, rn) be net requirement over n periods
• Now,
C(1) = K
C(2) = (K + hr2) / 2
C(3) = (K + hr2 + 2hr3) / 3
...
C(j) = [K + hr2 +...+ (j-1)hrj ] / j
• When C(j) > C(j-1), stop. Set production level = r1+r2+...+rj-1.
Begin process again from period j .
• Use Silver-Meal heuristic to find lot sizes, & perform the
MRP calculations. What will the total cost?
IEOR @ IITBombay IE503: Operations Analysis
 Least Unit Cost Heuristic to find lot size
Similar to Silver-Meal.
• C(T): Average holding and setup cost per unit for T period
order.
• Let (r1, r2, …, rn) be net requirement over n periods
• Now,
C(1) = K/ r1
C(2) = (K + hr2) / (r1 + r2)
C(3) = (K + hr2 + 2hr3) / (r1 + r2 + r3)
...
C(j) = [K + hr2 +...+ (j-1)hrj ] / [r1 + r2 ... + rj ]
• When C(j) > C(j-1), stop. Set production level y1 = r1+r2+...+rj-1.
Begin process again from period j .

• Use Least Unit Cost heuristic to find lot sizes, & perform the
MRP calculations. What will the total cost?
IEOR @ IITBombay IE503: Operations Analysis
 Summary
• We have seen many lot sizing heuristics to help
determine the production quantity
– Lot-for-Lot. (LFL)
– Fixed Order Period (FOP)
– EOQ
– Silver-Meal Heuristic
– Least Unit Cost Heuristic
– Part Period Balancing Approach
• All these are heuristics: Does not guarantee
optimal solution.

IEOR @ IITBombay IE503: Operations Analysis