Dr. S. S. Bhakar Director, PIMG

‘‘ I often feel like the director of a cemetery. I have a lot of people under me. But nobody listens! ’’ - General John Gavin

Lot size decision impacts on Inventory levels Setup & ordering costs Capacity requirement Availability Lot Size Decision is Impacted By Number of Level in BOM Cost of setup or purchase order Cost of carrying an item in inventory Low level code of an item Lot sizing decision – impacts on Determined

Lot Sizing & Safety Stock Lot Size Item quantity that is made or purchased. Safety Stock Quantity of Stock planned to be in inventory to protect against fluctuations in demand and / or supply

Lot Sizing Techniques Fixed Order Quantity (FOQ) Economic Order Quantity (EOQ) Lot-for-lot (LRL) Periods of Supply (POS) Period Order Quantity (POQ) Least Unit Cost (LUC) Least Total Cost (LTC) Part Period Balancing (PPB)

Fixed Order Quantity (FOQ) Specify a Number of Units arbitrarily to be ordered each time an order is placed for a particular item Quantity may be arbitrary or EOQ

Example – FOQ O rder Quantity 500 Safety Stock =80 Lead Time =2 Weeks Week Gross Requirement Scheduled Receipts Projected available Planned Receipts 500 Planned Order Release 500

Economic Order Quantity (EOQ) A type of fixed order quantity that determines the amount of an item to be purchased or made at one time Goal= minimize the combined cost of ordering (acquiring) and carrying inventory EOQ =√2D*C O /C H D= Annual demand for the item Q = Order quantity CO= Cost of order preparation or setup cost CH=Inventory carrying cost per unit per year

Example –EOQ Setup cost =$10/order : cost of item =$ 1.50/ unit : Inventory carrying =25% / year Order Quantity EOQ Safety Stock =80 Lead Time =2 Weeks Week Gross Requirement Scheduled Receipts Projected available Planned Receipts 650 Planned Order Release 650 Avg. Demand=152.5/wk EOQ=√2CO D/C H = √2(10)(7,93) / 0.25 x 1.50=650 D=152`52 wks/yr =7,930

Lot-for-Lot (LFL) Also called discrete order quantity. It generates planned orders in quantities equal to the net requirements in each period No extra on–hand inventory used for perishable food items or items for which the market fluctuates widely

Example –LFL order Quantity LFL Safety Stock =80 Lead Time =2 Weeks Week Gross Requirement Scheduled Receipts Projected available80 Planned Receipts Planned Order Release

Periods of Supply (POS) Lot size will be equal to the net requirements for a given number of periods (e.g. weeks) into the future

Example –POS order Quantity POS 3 Weeks Safety Stock =80 Lead Time =2 Weeks Week Gross Requirement Scheduled Receipts Projected available Planned Receipts Planned Order Release

Period order quantity (POQ) Uses EOQ to calculate a fixed number of period requirements to include in each order POQ = EOQ / Avg. Period Usages In case of fraction, round to the nearest number

EOQ =650 (slide #13) order Quantity POQ Safety Stock =80 Lead Time =2 Weeks Week Gross Requirement Scheduled Receipts Projected available ?? Planned Receipts 630 Planned Order Release 630 Avg Week Use = :POQ =650/152.5 =4.26>>4 Example –POQ

Least Unit Cost (LUC) A dynamic lot sizing technique that Adds ordering cost & Inventory carrying cost for each trial lot size Divides by the numbers of units in the lot size Then Picking the lot size with the lowest unit cost

Example –LUC Carrying Cost Future Reqmnt In Period Cum Order Qty Excess Inv Week Carried Order Cost This Period Cum CostTotal Cost Unit Cost Inventory carrying cost = (25%) ($1.50/52) = $ /unit /wk *=Carrying cost- (260) ( ) (1wk) = 1.875: (1.85) ( ) (4 Wks) =5.337  115) ( ) (5wks) =4.147

Example –LUC order Quantity LUC =COQ* =630 Safety Stock =80 Lead Time =2 Weeks Week Gross Requirement Scheduled Receipts Projected available ?? Planned Receipts 630 Planned Order Release 630

Least Total Cost (LTC) Dynamic lot sizing technique that calculates the order quantity by Comparing the carrying cost and the cost of ordering for various lot sizes Selects the lot where these costs are most nearly equal For dependent demand, total cost is discrete and the minimum total cost over the planning period usually occurs at the point closest to the balance of carrying cost & ordering costs.

Example –LTC Carrying Cost Future Reqmnt In Period Cum Order Qty Excess Inv Week Carried Order Cost This PeriodCum CostTotal Cost

Example –LTC order Quantity LTC =815 Safety Stock =80 Lead Time =2 Weeks Week Gross Requirement Scheduled Receipts Projected available ? Planned Receipts 815? Planned Order Release 815?

Part Period Balancing (PPB) Variation of LTC With Look Ahead/ look back Steps Compute the economic part period (EPP) EPP= (Ordering cost) / Caring cost / unit /period) Example: EPP= 10/0.0072=1389 Add requirements period by period until the generated part periods approximate the EPP Part Periods: Number of units of inventory held for a period.

Example –PPB Part Period Future Reqmnt In PeriodCum Order Qty Excess InvWeek Carried This PeriodCum Cost

Example –PPB order Quantity PP =815 Safety Stock =80 Lead Time =2 Weeks Week Gross Requirement Scheduled Receipts Projected available ? Planned Receipts 815? Planned Order Release 815?

“I hear and I forget, I see and I remember. I do and I understand.” -Chinese Proverb