Lot Sizing

(Heuristic Approach)

IPE4103
Materials Requirements Planning
BOM

Assembly and
Sub-assembly

BOM >> MRP MRP

Schedule Receipts
and Inventory
Lead Time
Adjustment

Lot for Lot

Time Phase
Requirements
 Lot Sizing
Lot sizing is considered to minimize the sum of ordering cost or setup cost and holding cost.

Managers often use economic order sizes and economic production quantities for independent-
demand items.

Demand tends to be lumpy for dependent demand, and the planning horizon shorter so that
economic lot sizes are usually much more difficult to identify for dependent-demand items.

In lot sizing there is no single plan that has a clear advantage over the other planning.

The Combining period demands into a single order, particularly for middle-level or end items, has
a cascading effect down through the product tree; that is, in order to achieve this grouping, one
must also group items at lower levels in the tree and incorporate their setup and holding costs
into the decision.
The uneven period demand and the relatively short planning horizon require a continual recalculating
and updating of lot sizes.

Methods of lot sizing such as Lot-for-Lot, Economic Order Quantity (EOQ), Fixed Period Ordering, Silver-
Meal Heuristic, Part Period Balancing, and Least Unit Cost Heuristic.
 Lot Sizing - Types
The order or run size for each period is set equal to demand for that
Lot-for-
Lot period. Due to many different order sizes, the method can not achieve the
Ordering economics of fixed order size and it requires a new setup for each
production run unless the setup costs can be significantly reduced.

Economic
Order This method leads to minimum costs if usage is fairly uniform. This is sometimes the case for lower-level
Quantity items that are common to different parents and for raw materials.
(EOQ) Model

Every time you start a new lot, keep adding the net requirements of the
Silver-Meal
(SM) Heuristic subsequent periods, as long as the average (setup plus holding) cost per period
decreases.

Every time you start a new lot, keep adding the net
Least Unit
Cost (LUC)
requirements of the subsequent periods, as long as
Heuristic the average (setup plus holding) cost per unit
decreases.

Part Period Every time you start a new lot, add a number of subsequent periods such that the total holding cost matches the lot set up cost as
Balancing (PPB) much as possible.
Lot sizing – Silver Meal and Least Unit
Cost Heuristics
• Silver-Meal (SM): Every time you start a new lot,
keep adding the net requirements of the
subsequent periods, as long as the average (setup
plus holding) cost per period decreases.

• Least Unit Cost (LUC): Every time you start a new

lot, keep adding the net requirements of the
subsequent periods, as long as the average (setup
plus holding) cost per unit decreases.
 Silver–Meal Heuristic
The Silver–Meal heuristic (S-M Heuristic) is a
forward method that requires determining
the average cost per period as a function of the
number of periods the current order is to span
and stopping the computation when this
function first increases.

Z=function(holding cost, setup cost, number of

period, requirement)
 Procedure: S-M Heuristic
Define K, h and C(T):
K: the setup cost per lot produced.
h: holding cost per unit per period.
C(T) : the average holding and setup cost per period if the current order
spans the next T periods. Let (r1, r2, r3, …….,rn) be the requirements over
the n-period horizon.

To satisfy the demand for period 1

C(1) = K
The average cost = only the setup cost and there is no inventory holding
cost.
To satisfy the demand for period 1, 2 producing lot 1 and 2 in one setup
give us an average cost:
C(2) = (K + (h*r2))/2
The average cost = (the setup cost + the inventory holding cost of the lot
required in period 2.) divided by 2 periods.
 Procedure: S-M Heuristic
To satisfy the demand for period 1, 2, 3 Producing lot 1, 2 and 3 in one
setup give us an average cost:
C(3) = (K + (h*r2)+(2hr3))/3
The average cost =( the setup cost + the inventory holding cost of the lot
required in period 2+ the inventory holding cost of the lot required in
period 3) divided by 3 periods.

In general,
C(j) = (K + hr2 + 2hr3 + ... + (j − 1)hrj) / j
The search for the optimal T continues until C(T) > C(T − 1).

Once C(j) > C(j − 1), stop and produce r1 + r2 + r3 + ... + rj − 1 And, begin the
process again starting from period j.
For numerical example, see Malakooti (2013).
 Example of SM Heuristic
• K = $ 80 / setup
• h = $ 1/unit/period
• Given that requirements, r = (25,5,25,30) for week 1, 2, 3 and 4
respectively
• Find the lot sizing (y1, y2, y3, y4) using S-M Heuristic.
• C(1)=(K)/1=k=80
• C(2)=(k+1xhx5)/2=(80+5)/2=42.5
• C(3)=(k+1xhx5+2xhx25)/3=135/3=45
• C(3) > C(3-1) stop y1=r1+r2 = 25+5=30, y2=0
• C’(1)=K/1=80
• C’(2) = (K+1xhx30)/2=110/2=55
• Y3=r3+r4=25+30=55, y4=0
• Lot size (30,0,55,0)
 Least-Unit Cost Heuristic
This is another heuristic algorithm similar to Silver-Meal algorithm,
called Least-Unit-Cost (LUC) heuristic.

The LUC method purpose is to minimize the total holding cost by finding
the average cost per part, as compared to the average cost per period of
the Silver–Meal method (Malakooti,2013):

C(j) = (K + hr2 + 2hr3 + ... + (j − 1)hrj) / (r1+r2+...+rj)

Once C(j) > C(j − 1), stop and produce r1 + r2 + r3 + ... + rj − 1 and, begin
the process again starting from period j.

After the first lot size is determined, the procedure is repeated using the
next available net requirement.
 Example of LUC Heuristic
• K = $ 80 / setup
• h = $ 1/unit/period
• Given that requirements, r = (25,5,25,30) for week 1, 2, 3 and 4
respectively
• Find the lot sizing (y1, y2, y3, y4) using LUC Heuristic.
• C(1)=(K)/r1=k/25=80/25=3.2
• C(2)=(k+1xhx5)/(r1+r2)=(80+5)/30=2.83
• C(3)=(k+1xhx5+2xhx25)/55=135/55=2.45
• C(4) = (k+hx5+2xhx25+3xhx30)/85 = 2.65
• C(4) > C(4-1) stop y1=r1+r2+r3 = 25+5+25=55, y2=0, y3 = 0
• C’(1)=k/30=80/30=2.67
• Y4=30
• Lot size (55,0,0,30)
 Lot Sizing: Fixed and Part Period
• Fixed-Period Ordering: This method provides coverage for some
predetermined number of periods. A simple rule is to place an
order to cover a two-period interval.

• Part-Period Model: The term part period refers to holding a part or

parts over a number of periods. For instance, if 10 parts were held
for two periods, this would be 10 × 2 = 20 part periods. The
economic part period (EPP) can be computed as the ratio of setup
costs to the cost to hold a unit for one period.
– To determine an order size that is consistent with the EPP, various
cumulative order sizes are examined for a planning horizon, and each
one's number of part periods is determined. The one that comes
closet to the EPP is selected as the best lot size.
– It is often necessary to run a proposed master schedule through MRP
processing to obtain a clear picture of actual requirements, which can
then be compared to available capacity and materials.
 Gross Requirements, Schedules
Receipts, Projected on Hand Inventory
• Gross requirements: The total expected demand for an end item or
raw material during each time period without regard to the amount
on hand. For end items, these quantities are shown in the master
schedule; for components, these quantities are derived from the
planned-order releases of their immediate "parents.“

• Scheduled receipts: Open orders scheduled to arrive from vendors

or elsewhere in the pipeline by the beginning of a period.

• Projected on hand: The expected amount of inventory that will be

on hand at the beginning of each time period, i.e., scheduled
receipts plus available inventory from last period.
 Net Requirements, Planned Order
Receipts, Planned order Release
• Net requirements: The actual amount needed in each time period.

• Planned-order receipts: The quantity expected to be received by

the beginning of the period in which it is shown. Under lot-for-lot
ordering, this quantity will equal net requirements. Under lot-sizing
ordering, this quantity may exceed net requirements. Any excess is
added to available inventory in the next time period for simplicity,
although in reality, it would be available in that period.

• Planned-order releases: Indicates a planned amount to order in

each time period; equals planned-order receipts offset by lead
time. This amount generates gross requirements at the next level in
the assembly or production chain. When an order is executed, it is
removed from "planned-order releases" and enter under
"scheduled receipts.”
 Example – EOQ and Lot-for-Lot
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. R={30, 50, 10, 20, 70, 80, 20,
60, 200, 50}

Week Gross requirements Week Gross requirements

1 30 6 80
2 50 7 20
3 10 8 60
4 20 9 200
5 70 10 50

Determine the lot sizes.

 Example
• K = $ 80 / setup
• h = $ 1/unit/period
• Given that requirements, r = (25,5,45,30,5) for
week 1, 2, 3, 4and 5 respectively
• Find the lot sizing (y1, y2, y3, y4, y5) using S-M
and LUC Heuristic.