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Lot Sizing Techniques To determine batch size for purchased or produced items Anand Subramaniam
<ul><li>“ I often feel like the director of a cemetery. I have a lot of people under me, but nobody listens!” </li></ul><u...
Lot Sizing Decision – Impact & Determined <ul><li>Lot Size Decision Impacts On </li></ul><ul><li>Inventory levels </li></u...
Lot Sizing & Safety Stock  Lot Size Item quantity that is made or purchased. Safety Stock  Quantity of stock planned to be...
Lot Sizing Techniques <ul><li>Fixed Order Quantity (FOQ) </li></ul><ul><li>Economic Order Quantity (EOQ) </li></ul><ul><li...
Fixed Order Quantity (FOQ) <ul><li>Specify a number of units arbitrarily to be ordered each time an order is placed for a ...
Example - FOQ           500   500   Planned Order Releases       500   500       Planned Receipts 150 265 450 570 200 460 ...
Economic Order Quantity (EOQ) <ul><li>A type of fixed order quantity that determines the amount of an item to be purchased...
Example - EOQ Avg. Demand = 152.5/wk  D = 152.5 ´ 52 wks/yr = 7,930  EOQ =  =  = 650  50 . 1 25 . 0 ) 930 , 7 )( 10 ( 2  ...
Lot-for-Lot (LFL) <ul><li>Also called discrete order quantity </li></ul><ul><li>It generates planned orders in quantities ...
Example – LFL     115 185 120 130 260 120   Planned Order Releases 115 185 120 130 260 120       Planned Receipts 80 80 80...
Periods of Supply (POS) <ul><li>Lot size will be equal to the net requirements for a given number of periods (e.g. weeks) ...
Example - POS 3 Weeks         420     510   Planned Order Releases     420     510       Planned Receipts 80 195 380 80 21...
Period Order Quantity (POQ) <ul><li>Uses EOQ to calculate a fixed number of period requirements to include in each order <...
Example - POQ EOQ = 650 (Slide # 13)               630   Planned Order Releases           630       Planned Receipts ? ? 8...
Least Unit Cost (LUC) <ul><li>A dynamic lot sizing technique that   </li></ul><ul><ul><li>Adds ordering cost & inventory c...
Example - LUC COQ *= Carrying cost - (260)(0.007212)(1 wk) = 1.875 : (185)(0.007212)(4 wks) = 5.337 : (115)(0.007212)(5 wk...
Example - LUC LUC = COQ* = 630               630   Planned Order Releases           630       Planned Receipts ? ? 80 200 ...
Least Total Cost (LTC) <ul><li>Dynamic lot sizing technique that calculates the order quantity by </li></ul><ul><ul><li>Co...
Example - LTC 25.83 15.83 4.15 10 5 115 930 8 115 21.68 11.68 5.34 10 4 185 815 7 185 16.35 6.35 2.60 10 3 120 630 6 120 1...
Example - LTC LTC = 815       ?         815   Planned Order Releases   ?         815       Planned Receipts ? 80 265 385 5...
Part Period Balancing (PPB) <ul><li>Variation of LTC with look ahead / look back  </li></ul><ul><li>Steps </li></ul><ul><u...
Example - PPB 2195 575 5 115 930 8 115 1620 740 4 185 815 7 185 880 360 3 120 630 6 120 520 260 2 130 510 5 130 260 260 1 ...
Example - PPB PPB = 815       ?         815   Planned Order Releases   ?         815       Planned Receipts ? 80 265 385 5...
<ul><li>“ I hear and I forget, I see and I remember. I do and I understand.” </li></ul><ul><ul><li>-  Chinese Proverb </li...
<ul><li>Good Luck </li></ul><ul><li>http://www.linkedin.com/in/anandsubramaniam   </li></ul>
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Lot Sizing Techniques

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To determine batch size for purchased or produced items : reduce MRP nervousness

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Transcript of "Lot Sizing Techniques"

  1. 1. Lot Sizing Techniques To determine batch size for purchased or produced items Anand Subramaniam
  2. 2. <ul><li>“ I often feel like the director of a cemetery. I have a lot of people under me, but nobody listens!” </li></ul><ul><ul><li>- General John Gavin </li></ul></ul>
  3. 3. Lot Sizing Decision – Impact & Determined <ul><li>Lot Size Decision Impacts On </li></ul><ul><li>Inventory levels </li></ul><ul><li>Setup & ordering costs </li></ul><ul><li>Capacity requirement </li></ul><ul><li>Availability </li></ul><ul><li>Lot Size Decision Impacted By </li></ul><ul><li>Number of level in BOM </li></ul><ul><li>Cost of setup or purchase order </li></ul><ul><li>Cost of carrying an item in inventory </li></ul><ul><li>Low level code of an item </li></ul>
  4. 4. 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
  5. 5. Lot Sizing Techniques <ul><li>Fixed Order Quantity (FOQ) </li></ul><ul><li>Economic Order Quantity (EOQ) </li></ul><ul><li>Lot-for-Lot (L4L) </li></ul><ul><li>Periods of Supply (POS) </li></ul><ul><li>Period Order Quantity (POQ) </li></ul><ul><li>Least Unit Cost (LUC) </li></ul><ul><li>Least Total Cost (LTC) </li></ul><ul><li>Part Period Balancing (PPB) </li></ul>
  6. 6. Fixed Order Quantity (FOQ) <ul><li>Specify a number of units arbitrarily to be ordered each time an order is placed for a particular item </li></ul><ul><li>Quantity may be arbitrary or EOQ </li></ul>
  7. 7. Example - FOQ           500   500   Planned Order Releases       500   500       Planned Receipts 150 265 450 570 200 460 80 240 370 Projected Available                   Scheduled Receipts 115 185 120 130 260 120 160 130   Gross Requirement 8 7 6 5 4 3 2 1 Lead Time = 2 weeks Week Safety Stock = 80 500 Order Quantity
  8. 8. Economic Order Quantity (EOQ) <ul><li>A type of fixed order quantity that determines the amount of an item to be purchased or made at one time </li></ul><ul><li>Goal = minimise the combined cost of order (acquiring) and carrying inventory </li></ul><ul><li>EOQ = </li></ul><ul><ul><li>D = Annual demand for the item </li></ul></ul><ul><ul><li>Q = Order quantity </li></ul></ul><ul><ul><li>CP = Cost of order preparation or Setup cost </li></ul></ul><ul><ul><li>CH = Inventory carrying cost per unit per year </li></ul></ul>H p C D C / 2
  9. 9. Example - EOQ Avg. Demand = 152.5/wk D = 152.5 ´ 52 wks/yr = 7,930 EOQ = = = 650 50 . 1 25 . 0 ) 930 , 7 )( 10 ( 2        650       650   Planned Order Releases   650       650       Planned Receipts 450 565 100 220 350 610 80 240 370 Projected Available                   Scheduled Receipts 115 185 120 130 260 120 160 130   Gross Requirement 8 7 6 5 4 3 2 1 Lead Time = 2 weeks Week Safety Stock = 80 EOQ Order Quantity Setup cost = $10/order : Cost of item = $1.50/unit : Inventory carrying cost = 25% /year
  10. 10. Lot-for-Lot (LFL) <ul><li>Also called discrete order quantity </li></ul><ul><li>It generates planned orders in quantities equal to the net requirements in each period </li></ul><ul><li>No extra on-hand inventory </li></ul><ul><li>Used for perishable food items or items for which the market fluctuates widely </li></ul>
  11. 11. Example – LFL     115 185 120 130 260 120   Planned Order Releases 115 185 120 130 260 120       Planned Receipts 80 80 80 80 80 80 80 80 80 Projected Available             160 130   Scheduled Receipts 115 185 120 130 260 120 160 130   Gross Requirement 8 7 6 5 4 3 2 1 Lead Time = 2 weeks Week Safety Stock = 80 LFL Order Quantity
  12. 12. Periods of Supply (POS) <ul><li>Lot size will be equal to the net requirements for a given number of periods (e.g. weeks) into the future </li></ul>
  13. 13. Example - POS 3 Weeks         420     510   Planned Order Releases     420     510       Planned Receipts 80 195 380 80 210 470 80 240 370 Projected Available                   Scheduled Receipts 115 185 120 130 260 120 160 130   Gross Requirement 8 7 6 5 4 3 2 1 Lead Time = 2 weeks Week Safety Stock = 80 POS Order Quantity
  14. 14. Period Order Quantity (POQ) <ul><li>Uses EOQ to calculate a fixed number of period requirements to include in each order </li></ul><ul><li>POQ = EOQ / Avg. Period Usage In case of fraction, round to the nearest number </li></ul>
  15. 15. Example - POQ EOQ = 650 (Slide # 13)               630   Planned Order Releases           630       Planned Receipts ? ? 80 200 330 590 80 240 370 Projected Available                   Scheduled Receipts 115 185 120 130 260 120 160 130   Gross Requirement 8 7 6 5 4 3 2 1 Lead Time = 2 weeks Week Safety Stock = 80 Avg Week Use = 152.5 : POQ = 650/152.5 = 4.26 » 4 POQ Order Quantity
  16. 16. Least Unit Cost (LUC) <ul><li>A dynamic lot sizing technique that </li></ul><ul><ul><li>Adds ordering cost & inventory carrying cost for each trial lot size </li></ul></ul><ul><ul><li>Divides by the number of units in the lot size </li></ul></ul><ul><ul><li>Then picking the lot size with the lowest unit cost </li></ul></ul>
  17. 17. Example - LUC COQ *= Carrying cost - (260)(0.007212)(1 wk) = 1.875 : (185)(0.007212)(4 wks) = 5.337 : (115)(0.007212)(5 wks) = 4.147 Inventory carrying cost = (25%)($1.50/52) = $0.007212/unit/wk 0.028 25.83 15.83 4.15 10 5 115 930 8 115 0.027 21.68 11.68 5.34 10 4 185 815 7 185 0.026 16.35 6.35 2.60 10 3 120 630 6 120 0.027 13.75 3.75 1.88 10 2 130 510 5 130 0.031 11.88 1.88 1.88 10 1 260 380 4 260 0.083 10 0.00 0.00 10 0 0 120 3 120 Unit Cost Total Cost Cum Cost This Period (*) Order Cost Week Carried Excess Inv Cum Order Qty In Period Future Reqmnt     Carrying Cost            
  18. 18. Example - LUC LUC = COQ* = 630               630   Planned Order Releases           630       Planned Receipts ? ? 80 200 330 590 80 240 370 Projected Available                   Scheduled Receipts 115 185 120 130 260 120 160 130   Gross Requirement 8 7 6 5 4 3 2 1 Lead Time = 2 weeks Week Safety Stock = 80 Order Quantity
  19. 19. Least Total Cost (LTC) <ul><li>Dynamic lot sizing technique that calculates the order quantity by </li></ul><ul><ul><li>Comparing the carrying cost and the ordering costs for various lot size </li></ul></ul><ul><ul><li>Selects the lot where these costs are most nearly equal </li></ul></ul><ul><li>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 </li></ul>
  20. 20. Example - LTC 25.83 15.83 4.15 10 5 115 930 8 115 21.68 11.68 5.34 10 4 185 815 7 185 16.35 6.35 2.60 10 3 120 630 6 120 13.75 3.75 1.88 10 2 130 510 5 130 11.88 1.88 1.88 10 1 260 380 4 260 10 0.00 0.00 10 0 0 120 3 120 Total Cost Cum Cost This Period Order Cost Week Carried Excess Inv Cum Order Qty In Period Future Reqmnt   Carrying Cost            
  21. 21. Example - LTC LTC = 815       ?         815   Planned Order Releases   ?         815       Planned Receipts ? 80 265 385 515 775 80 240 370 Projected Available                   Scheduled Receipts 115 185 120 130 260 120 160 130   Gross Requirement 8 7 6 5 4 3 2 1 Lead Time = 2 weeks Week Safety Stock = 80 Order Quantity
  22. 22. Part Period Balancing (PPB) <ul><li>Variation of LTC with look ahead / look back </li></ul><ul><li>Steps </li></ul><ul><ul><li>Compute the economic part period (EPP): </li></ul></ul><ul><ul><ul><li>EPP = (Ordering Cost) / (Carrying cost/unit/period) </li></ul></ul></ul><ul><ul><ul><li>Example: EPP = 10/0.0072 = 1389 </li></ul></ul></ul><ul><ul><li>Add requirements period by period until the generated part periods approximate the EPP </li></ul></ul><ul><li>Part periods </li></ul><ul><ul><li>Number of units of inventory held for a period </li></ul></ul>
  23. 23. Example - PPB 2195 575 5 115 930 8 115 1620 740 4 185 815 7 185 880 360 3 120 630 6 120 520 260 2 130 510 5 130 260 260 1 260 380 4 260 0 0 0 0 120 3 120 Cum Cost This Period Week Carried Excess Inv Cum Order Qty In Period Future Reqmnt Part Period          
  24. 24. Example - PPB PPB = 815       ?         815   Planned Order Releases   ?         815       Planned Receipts ? 80 265 385 515 775 80 240 370 Projected Available                   Scheduled Receipts 115 185 120 130 260 120 160 130   Gross Requirement 8 7 6 5 4 3 2 1 Lead Time = 2 weeks Week Safety Stock = 80 Order Quantity
  25. 25. <ul><li>“ I hear and I forget, I see and I remember. I do and I understand.” </li></ul><ul><ul><li>- Chinese Proverb </li></ul></ul>
  26. 26. <ul><li>Good Luck </li></ul><ul><li>http://www.linkedin.com/in/anandsubramaniam </li></ul>

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