Inventory Models

Production Lot Size Models

PRODUCTION LOT SIZE MODELS

In a production lot size model, we are a manufacturer, trying to determine how much to produce (the production lot size) during each production run.

Like the EOQ model with Q = the production lot size except:
We are producing at a rate P/yr. that is greater than the demand rate of D/yr.
Otherwise run process continuously and sell items as fast as they are produced

Inventory does not jump to Q but builds up to a value IMAX that is reached when production is ceased

What is the maximum inventory and the average inventory per cycle?
Length of a production run = Q/P During a production run
Amount Produced = Q Amount Demanded = D(Q/P)

IMAX = Q - D(Q/P) = (1-D/P)Q Average inventory = IMAX/2 = ((1-D/P)/2)Q

PRODUCTION LOT SIZE -TOTAL ANNUAL COST

Q = The production lot size CO = Set-up cost rather than order cost =$/setup Number of Set-ups per year = D/Q Average Inventory = ((1-D/P)/2)Q Instantaneous set-up time/infinite time horizon TC(Q) = CO(D/Q) + Ch((1-D/P)/2)Q + CD

OPTIMAL PRODUCTION LOT SIZE, Q*

TC(Q) = CO(D/Q) + Ch((1-D/P)/2)Q + CD
dTC CO D Ch (1 D / P ) 00 2 dQ Q 2 Solving, 2CO D Q Ch (1 D / P )
2

Q
*

2CO D Lot Size Ch (1 D / P )

EXAMPLE-- Farah Cosmetics

Production Capacity 1000 tubes/hr. Daily Demand 1680 tubes Production cost $0.50/tube (C = 0.50) Set-up cost $150 per set-up (CO = 150) Holding Cost rate: 40% (Ch = .4(.50) = .20)

Since demand is 1680 per day and the production rate is 1000 per hour:
D = 1680(365) = 613,200 P = 1000(24)(365) = 8,760,000

OPTIMAL PRODUCTION LOT SIZE

2CO D 2(150)(613,200) Q* 31,449 613,200 Ch (1 D / P) .20(1 ) 8,760,000

TOTAL ANNUAL COST

TOTAL ANNUAL COST = TC(Q) = TV(Q) + CD TV(Q) = CO(D/Q) + Ch((1-D/P)/2)Q =
(150)(613,200/31,449) + .2((1-(613,200/8,760,000))(31,449)/2)

= $5,850
TC(Q) = TV(Q) + CD =
5,850 + .50(613,200) = $312,450

OTHER QUANTITES
Length of a Production run = Q*/P = 31,449/8,760,000 = .00359yrs. = .00359(365) = 1.31 days Length of a Production cycle = Q*/D =
31,449/613,200 = .0512866yrs. = .00512866(365)

= 18.72 days

# of Production runs/yr. = D/Q* = 19.5

IMAX = (1-(613,200/8,760,000))(31,449) = 29,248

REORDER (SETUP) POINT ANALYSIS

The reorder point (actually the setup point) and safety stock determination are not affected by the calculation of Q*. It is found in the same way as before:
r* = LD + SS if demand is constant over lead time r* is found using service levels if demand varies during lead time

Using the Template

Optimal Values Enter Parameters Production Lot Size Worksheet

Review
Production Lot Size Models find the amount to produce per production run P > D, else optimal solution is to run machine continuously Same as EOQ except IMAX = Q(1-D/P) Length of a production run = Q*/P Length of the production cycle = Q*/D Reorder (setup) point analysis is not affected. Use of template