The effect of lot-sizing on workload variability

Abstract Lot-sizing models which group demand requirements for one or more consecutive time periods into a single production run have received considerable attention in recent years. Material Requirements Planning (MRP) systems must, for instance, make a lot-size decision for each planned order release. Existing decision models attempt to minimize the sum of setup plus inventory holding costs. However, lot-sizing tends to increase the work center load variability, and, consequently, the costs associated with changing production levels from period to period should be incorporated into the economic analysis. This study is concerned, first of all, with analytically describing the relationship between dynamic lot-sizing models and workload variability. Secondly, in order to account for production level change costs we propose a simple modification to existing heuristic models. Lastly, we employ a simulation model to empirically extend these results to a typical MRP multiechelon production environment. An example is included to show clearly that with cost premiums for overtime and severance or guaranteed minimum costs for undertime the traditional lot-sizing techniques significantly underestimate actual costs and can lead to very costly policies. Mean, variance and coefficient of variation of period work time requirements are derived as a function of several algorithm characteristics. Average cycle time (number of periods covered by a single batch) is found to be the most influential factor in determining workload variability. Variance grows approximately in proportion to this cycle time with the proportionality constant being the square of average period workload. Cycle time and demand variability also contribute to workload variability. Results indicate that for a given average cycle time, the EOQ method will minimize workload variability. When N products utilize the same work center, the coefficient of load variation will be reduced by a factor of N − 1 2 unless requirements are positively correlated. Positive correlation would result when products have similar seasons or parent items. In this case grouping such products cannot help reduce variability. In order to incorporate production level change costs into existing heuristics we may simply introduce a term consisting of a penalty factor times average cycle time. The penalty factor represents the costs of period by period production level changes. Several popular heuristics are extended in this fashion, and it is found that solutions are still readily obtainable, requiring only modifications to setup or holding cost parameters. The effects of level change costs are examined via simulation for a specific yet typical environment. It is found that when setup costs are significant, traditional lot-sizing heuristics can provide cost savings and service level improvements as compared to lot-for-lot production. However, whereas for our model the obtainable profit improvement from lot-sizing was 25% in the case of freely variable capacity, actual improvements were only one half as large when reasonable hiring and firing practices and overtime and undertime costs were considered. Consequently, management needs to consider carefully labor costs and work center product relationships when determining a production scheduling method.