1. AN ECONOMIC LOT-SIZE HEURISTIC: SIMPLIFIED PROCEDURE WITH
BACKORDERS
Vivek Ananthakrishnan, Ashwin Sundaram Ramesh, Dr. Sanjay Joshi
Master of Engineering, Industrial Engineering, Harold and Inge Marcus Department of Industrial and
Manufacturing Engineering
ABSTRACT
Proponents of Lean Manufacturing and the Theory of Constraints believe that the Economic Lot-Size
model is no longer relevant in the age of continuous or “one-piece” flow. However, most factories are
far from ideal and where significant setup costs exist, batch quantity remains an issue. Here, economic
lot-size offers important insights for practical decisions.
The first dynamic lot size model was introduced by Wagner and Whitin in 1958 that determines the
optimal lot sizes for a single item when demand, holding cost, and setup costs vary with time. The
motivation for the algorithm arose when the “square root formula” for an economic lot size no longer
assured a minimum cost solution for varying demand. According to the algorithm, it is feasible to
order inventory in period t for demand in period t + k, but not vice versa.
The Wagner-Whitin algorithm has been criticized for not allowing demand to go unsatisfied for some
periods and the large amount of computational time it requires for problems of realistic size. Although
extensions to the algorithm have been found to be computationally efficient, they are still not used in
shop work because they are not understandable to shop floor workers and production planners.
This paper proposes a user-friendly economic lot-size heuristic that rectifies earlier drawbacks by
incorporating varying backorder, holding, and setup costs. The procedure works equally well using a
computer or a paper and pencil, and is suitable for practical use.