Lot size

Lot size is a term used to describe the quantity of product that is produced in one manufacturing run. When companies produce products at a large scale, it is more cost effective to produce them in one large lot or batch, rather than in smaller, individual units. Generally, lot sizes are specified by the customer, this could be a certain quantity, or certain unit of measure such as gallons or liters.

The key elements that make up lot size are:

• The amount of product that is produced in the manufacturing run
• The unit of measure used to specify the lot size
• The customer requirements for the order

The size of the lot is determined based on customer requirements, product availability and the cost of production. Companies will typically strive to produce the most cost effective lot sizes, while still meeting customer demands. This can be achieved through a variety of techniques, such as inventory optimization or backordering. Lot size also impacts customer satisfaction, as a large lot size can reduce lead times and ensure a consistent supply of product.

Example of Lot size

To illustrate a lot size, let's consider a hypothetical example. Say a customer is looking to purchase 2,000 water bottles. In this case, the lot size would be 2,000 bottles, and the unit of measure would be bottles. The customer may also set other requirements, such as the type of bottle, size, and color. The company would then need to determine the most cost-effective way to produce the order, taking into account the customer requirements and product availability.

Formula of Lot size

$LotSize(LS)={\frac {(RxS)}{E}}$

Where:

• R = Reorder point
• S = Economic order quantity (EOQ)
• E = Order-up-to level

The formula for lot size helps to calculate the appropriate quantity to produce in a single run. Reorder point is the level at which new orders need to be placed, the economic order quantity is the optimum quantity to order to minimize cost and order-up-to level is the maximum quantity to order. The lot size is calculated by dividing the sum of reorder point and economic order quantity by the order-up-to level.

When to use Lot size

Lot size is used when producing products at a large scale. Companies will typically use lot size when the cost of manufacturing individual units is too high. Lot size is also used when there are certain customer requirements for the order, such as a certain quantity or unit of measure. Additionally, lot size can be used to reduce lead times and ensure a consistent supply of product.

Types of Lot size

There are a variety of different lot sizes that can be used. The most common are:

• Fixed lot size: This is the simplest type of lot size and involves producing a fixed quantity of product. For example, a company may produce 500 units of a product in each manufacturing run.
• Economic lot size: This type of lot size is determined by a cost benefit analysis and is used to minimize the cost of production. The economic lot size is calculated based on the cost to produce and the cost to store.
• Variable lot size: This type of lot size is based on customer demands and can vary from order to order. For example, a customer may order 20 units of a product, so the lot size would be 20 units.

Steps of Lot size

Lot size is typically determined by the following steps:

• Identify customer requirements: The customer's needs must be identified and taken into consideration when determining the lot size. This includes the quantity and unit of measure that the customer needs.
• Calculate the cost of production: The cost of production needs to be calculated in order to determine the most cost effective lot size. This includes the cost of the raw materials, labor, and overhead costs.
• Determine the most cost effective lot size: The most cost effective lot size will be determined based on the customer requirements and the cost of production.
• Produce the lot: Once the lot size has been determined, the lot can be produced and shipped to the customer.

Advantages of Lot size

• Cost Savings: Producing in large lots can reduce the cost of production, as the setup and run costs are spread over a larger quantity of product.
• Lead Time Reduction: Producing large lots can reduce lead times as the production process is faster and more efficient.
• Quality: Producing large lots can improve the quality of the product, as the same production conditions are applied to the entire lot.
• Consistent Supply: Producing large lots can ensure a consistent supply of product to the customer, as the lot size can be managed and adjusted accordingly.

Limitations of Lot size

Lot size is not without its limitations however. Producing large lots of product can be risky if customer demand is low or orders are cancelled. This can result in excess inventory, tying up capital and resources. Additionally, lot size optimization requires significant data analysis and forecasting, which can be a difficult task for companies.

Other approaches related to Lot size

In addition to the traditional approach to lot size, there are also other techniques that can be used to optimize lot size. These techniques include:

• Just-in-time inventory management: This approach involves producing inventory only when it is needed, which helps to reduce waste and inventory costs.
• Lean manufacturing: This approach focuses on reducing waste and optimizing the production process, which can help to reduce the cost of production.
• Target inventory levels: Companies can set target inventory levels that are based on customer demand, which can help to optimize lot size and reduce inventory costs.

Overall, lot size is an important factor in production, as it affects the cost, lead times and customer satisfaction. Companies can use a variety of techniques to optimize lot size, such as just-in-time inventory management, lean manufacturing, and target inventory levels. By using these techniques, companies can ensure that they are producing the most cost effective lot sizes while still meeting customer requirements.

Lot size — recommended articles

Minimum cost method — Takt time — Production batch — Minimum stock level — Abc inventory classification — Economic batch size — Optimum size of the order — Optimization of the production run-length — Optimization of transport

References

• Wagner, H. M., & Whitin, T. M. (1958). Dynamic version of the economic lot size model. Management science, 5(1), 89-96.
• Aggarwal, A., & Park, J. K. (1993). Improved algorithms for economic lot size problems. Operations research, 41(3), 549-571.
• Bitran, G. R., & Yanasse, H. H. (1982). Computational complexity of the capacitated lot size problem. Management Science, 28(10), 1174-1186.