IE6404 - Chapter 5: Dynamic Lot Sizing Methods

IE6404 - Chapter 5
Dynamic Lot Sizing Techniques
Dynamic Lot Sizing Methods

 Simple Rules
 Period order quantity
 Fixed period demand
 Lot for lot (L4L)
 Heuristic Methods
 Silver-Meal method (SM)
 Least Unit Cost (LUC)
 Part Period Balancing (PPB)
 Dynamic Programming (Optimum)
 Wagner-Whitin
1
A Prototype Example
Suppose for a certain product type you need to produce
weekly demand below:
Week 1 2 3 4 5 6 7 8
Demand 100 75 175 200 150 100 75 100
A = $50 per order
H = $0.5 per unit per week
Assumption:
Lead time is known with certainty (fixed lead time)
Period Order Quantity
 The average lot size desired is divided by

the average period demand
 For weekly demand given above evaluate
POQ for Q = 140 units, and 275 units.
2
POQ-Example Solution
Week 1 2 3 4 5 6 7 8
Demand 100 75 175 200 150 100 75 100
•Total demand over 8 periods = 975 units

•Average weekly demand = 975 / 8 = 122 units per week
POQ-Example Solution Continued

•Fixed period for order Q is determined as follows:
Where, Q = desired order (lot) size
= average demand over the planning period
T = number of periods (time interval between orders)
3
For Q = 140
T = fixed period between orders = 140 /122 = 1.14 = 1 week
Week Beginning Inventory Demand Order End Inventory

1 0 100 140 40
2 40 75 140 105
3 105 175 140 70
4 70 200 140 10
5 10 150 140 0
6 0 100 140 40
7 40 75 140 105
8 105 100 140 145
Total Cost = 8 ($50) + 515 ($0.5) = $657.5
7

For Q = 275
T = fixed period between orders = 275 /122 = 2.25 = 2 weeks
Week Beginning Inventory Demand Order End Inventory
1 0 100 275 175
2 175 75 --- 100
3 100 175 275 200
4 200 200 --- 0
5 0 150 275 125
6 125 100 --- 25
7 25 75 275 225
8 225 100 --- 125
Total Cost = 4 ($50) + 975 ($0.5) = $687.5
8
4
Fixed Period Demand
 Ordering m periods of demand,
m = selected fixed period
FPD for T = 2 weeks, and 4 weeks.
FPD-Example Solution
Week 1 2 3 4 5 6 7 8
Demand 100 75 175 200 150 100 75 100
For T = 2 weeks
Q1 = 175 units, Q3 = 375 units, Q5 = 250 units, Q7 = 175 units
For T = 4 weeks
Q1 = 550 units, Q5 = 425 unit
10
5
FPD-Example Solution for T=2
t Beginning Inventory Demand Qt End Inventory
1 0 100 175 75
2 75 75 0
3 0 175 375 200
4 200 200 0
5 0 150 250 100
6 100 100 0
7 0 75 175 100
8 100 100 0
Total cost = 4 ($50) + 475 ($0.5) = $437.5
11
FPD-Example Solution for T=4

1 0 100 550 450
2 450 75 375
3 375 175 200
4 200 200 0
5 0 150 425 275
6 275 100 175
7 175 75 100
8 100 100 0
Total cost = 2 ($50) + 1575 ($0.5) = $887.5
12
6
Lot For Lot Rule – L4L
 The order quantity is always the demand
for one period
L4L rule
13
L4L-Example Solution
Week 1 2 3 4 5 6 7 8
Demand 100 75 175 200 150 100 75 100
Lot size per order:
14
7
L4L-Example Solution Continued
1 0 100 100 0
2 0 75 75 0
3 0 175 175 0
4 0 200 200 0
5 0 150 150 0
6 0 100 100 0
7 0 75 75 0
8 0 100 100 0
Total cost = 8 ($50) + 0 ($0.5) = $400
15
Silver-Meal Method
 Heuristic approach to aim at a low-cost
solution that is not necessarily optimal
 Aim to achieve the minimum average cost
per period for the m-period span.
 The average cost per period includes
ordering and inventory holding costs
16
8
Silver-Meal Method
 The average cost per period is as follows:
Where;
m = number of demand periods to be ordered
in the present time.
A = fixed ordering cost per order
H = inventory holding cost per unit per period
K(m) = average cost per period during m periods
17
Silver-Meal Method
 Compute K(m) for m = 1,2,…,m
 Stop when, K(m+1) > K(m) , i.e. the period in
which the average cost per period start to
increase.
 Order the quantity equals to m periods demand.
Qi = D1 + D2 + … + Dm
 Qi is the quantity ordered in period i, and it
covers m periods into the future.
 The process repeats at period (m+i) and
continues through the planning horizon.
18
9
SM-Example
Determine the order quantities for the following lumpy
demands using Silver Meal algorithm
Week 1 2 3 4
Demand 100 75 175 200
A = $50 per order H = $0.5 per unit per week
19
For Q1:
Week 1 2 3 4
Demand 100 75 175 200
m=1, K(1) = 50
m=2, K(2) = 1/2 (50 + 0.5(75)) = 43.75 < K(1)
m=3, K(3) = 1/3 (50 + 0.5(75) + (2)(0.5)(175)) = 87.6 > K(2)
STOP
m=2 is selected for Q1
Q1 = D1 + D2  Q1 = 100 + 75 = 175 units
Next order should arrive in week 3,
So continue for Q3
20
10
For Q3:
Week 1 2 3 4
Demand 100 75 175 200
m=1, K(1) = 50
m=2, K(2) = 1/2 (50 + 0.5(200)) = 75 > K(1)
STOP
m=1 is selected for Q3
Q3 = D3  Q3 = 175 unit
Next order should arrive in week 4,
So continue for Q4
21
For Q4:
Week 1 2 3 4
Demand 100 75 175 200
Q4 = D4  Q4 = 200 units
22
11
SM-Example Solution Continued
1 0 100 175 75
2 75 75 0
3 0 175 175 0
4 0 200 200 0
Total cost = 3 ($50) + 75 ($0.5) = $187.5
23
Least Unit Cost

 Similar to SM algorithm except for the total
cost calculation
A  hD2  2hD3  ...  (m  1)hDm

K (m) 
D1  D2  D3  ...  Dm
The stopping rule: K(m+1) > K(m)
Order for m periods into the future : Qi = D1 + D2 + … + Dm
Continue from period (m+i) : Q(m+i)

24
12
LUC-Example
demands using Least Unit Cost method
Week 1 2 3 4
Demand 100 75 175 200
25
Part Period Balance

 Part Period (PP) is defined as the number of the
inventory carrying periods. PP balancing is the
quantity ordered which balance the A and H.
PP(m)  D2  2D3  ...  (m  1) Dm
A
PPF  Economic part period factor
H
The stopping rule: PP(m+1) > PPF
Order for m periods into the future : Qi = D1 + D2 + … + Dm
Continue from period (m+1) : Q(m+1)

26
13
PPB-Example
demands using Part Period Balancing method
Week 1 2 3 4
Demand 100 75 175 200
27
Wagner-Whitin Algorithm
 WW is an optimization procedure based on
dynamic programming to find optimum order
quantity policy Qi with a minimum cost solution.
 WW evaluates all possible ways of ordering to
cover demand in each period of the planning
horizon.
 Wagner-Whitin replaces EOQ for the case of
lumpy demand.
28
14
Cost of placing order:
Where;
K(t,m) = total cost of quantity ordered at period t for m periods
A = ordering cost,
H = inventory holding cost per unit per period
Dj = demand at period j
t = 1,2,..,N and m = t,t+1,t+2,…,N
29
For each period minimum cost is defined as:
 K*(m) = min t = 1,2,…,m {K*(t-1) + K(t,m)}

 K*(0) = 0
 K*(N) is defined as the least cost solution.
30
15
WW-Example Solution
Week 1 2 3 4
Demand 100 75 175 200
31
WW-Example Solution
Week 1 2 3 4
Demand 100 75 175 200
K*(0) = 0
For m=1
K*(1) = K*(0) + K(1,1) = 0 + A = 50
For m=2
K*(0) + K(1,2) = 0 + (A+HD2) = 50+0.5(75) = 87.5
K*(2) = min
K*(1) + K(2,2) = 50 + A = 50 + 50 = 100
K*(2) = 87.5 32
16
WW-Example Solution
Week 1 2 3 4
Demand 100 75 175 200
For m=3
K*(0) + K(1,3)= 0+[50+0.5(75)+2(0.5)(175)]=262.5
K*(3) = min K*(1) + K(2,3) = 50 +[50+0.5(175)]= 187.5
K*(2) + K(3,3) = 87.5 + 50 = 137.5
K*(3) = 137.5
K*(0) + K(1,m) should not be
K*(1) + K(2,m) considered for m>3
33
WW-Example Solution
Week 1 2 3 4
Demand 100 75 175 200
For m=4
K*(2) + K(3,4) = 87.5 +[50+0.5(200)]= 237.5
K*(4) = min
K*(3) + K(4,4) = 137.5 + 50 = 187.5
K*(4) = 187.5
should not be
K*(2) + K(3,m) considered for m>4
34
17
WW-Example Solution
Week 1 2 3 4
Demand 100 75 175 200
For m=4
K*(2) + K(3,4) = 87.5 +[50+0.5(200)]= 237.5
K*(4) = min
K*(3) + K(4,4) = 137.5 + 50 = 187.5
K*(4) = 187.5
Q4 = D4 = 200
Continue with K*(3)
35
WW-Example Solution
Week 1 2 3 4
Demand 100 75 175 200
For m=3
K*(0) + K(1,3)= 0+[50+0.5(75)+2(0.5)(175)]=262.5
K*(3) = min K*(1) + K(2,3) = 50 +[50+0.5(175)]= 187.5
K*(2) + K(3,3) = 87.5 + 50 = 137.5
K*(3) = 137.5
Q3 = D3 = 175
Continue with K*(2)
36
18
WW-Example Solution
Week 1 2 3 4
Demand 100 75 175 200
For m=2
K*(0) + K(1,2) = 0 + (A+HD2) = 50+0.5(75) = 87.5
K*(2) = min
K*(1) + K(2,2) = 50 + A = 50 + 50 = 100
K*(2) = 87.5
Q1 = D1 + D2 = 175
37
WW-Example Solution
1 0 100 175 75
2 75 75 0
3 0 175 175 0
4 0 200 200 0
Total cost = 3 ($50) + 75 ($0.5) = $187.5
38
19

IE6404 - Chapter 5: Dynamic Lot Sizing Methods

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IE6404 - Chapter 5: Dynamic Lot Sizing Methods

Uploaded by

Copyright:

Available Formats

IE6404 - Chapter 5

Dynamic Lot Sizing Techniques

Dynamic Lot Sizing Methods

Period Order Quantity

 The average lot size desired is divided by

•Total demand over 8 periods = 975 units

POQ-Example Solution Continued

Where, Q = desired order (lot) size

= average demand over the planning period

T = number of periods (time interval between orders)

Week Beginning Inventory Demand Order End Inventory

POQ-Example Solution Continued

Total cost = 4 ($50) + 475 ($0.5) = $437.5

FPD-Example Solution for T=4

Total cost = 2 ($50) + 1575 ($0.5) = $887.5

Q1 = 100 units, Q2 = 75 units, Q3 = 175 units, Q4 = 200 units

Q5 = 150 units, Q6 = 100 units, Q7 = 75 units, Q8 = 100 units

Total cost = 8 ($50) + 0 ($0.5) = $400

A = $50 per order H = $0.5 per unit per week

Total cost = 3 ($50) + 75 ($0.5) = $187.5

Least Unit Cost

A  hD2  2hD3  ...  (m  1)hDm

The stopping rule: K(m+1) > K(m)

Order for m periods into the future : Qi = D1 + D2 + … + Dm

Continue from period (m+i) : Q(m+i)

A = $50 per order H = $0.5 per unit per week

Part Period Balance

Order for m periods into the future : Qi = D1 + D2 + … + Dm

Continue from period (m+1) : Q(m+1)

A = $50 per order H = $0.5 per unit per week

For each period minimum cost is defined as:

 K*(m) = min t = 1,2,…,m {K*(t-1) + K(t,m)}

A = $50 per order H = $0.5 per unit per week

Total cost = 3 ($50) + 75 ($0.5) = $187.5

You might also like

 K(m) = min t = 1,2,…,m {K(t-1) + K(t,m)}