Page 164 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 7: Inventory Management

Other EOQ Adjustments Notes

A variety of special situations may occur that will require adjustments to the basic EOQ. Examples
are:
1. Production lot size

2. Multiple-item purchase
3. Limited capital
4. Private trucking. Production lot size refers to the most economical quantities from a
manufacturing perspective. Multiple-item purchase describes situations when more than
one product is bought concurrently, so that quantity and transportation discounts must
consider the impact of product combinations. Limited capital refers to situations with
budget limitations for total inventory investment. Since the product line must be satisfied
within the budget limitations, order quantities must recognize the need to allocate the
inventory investment across the product line.

7.3.3 Discrete Lot Sizing

Not all resupply situations operate with uniform usage rates like those in the previous EOQ
computations. In many manufacturing situations, the demand for a specific component tends to
occur at irregular intervals and for varied quantities. The irregular nature of usage requirements
is a consequence of demand being dependent upon the production schedule. That is, the required
assembly parts must be available at the time manufacture occurs. Between requirement times,
no need exists to maintain component inventory in stock if it can be obtained when needed.
Inventory servicing of dependent demand requires a modified approach to the determination of
order quantities, referred to as discrete lot sizing. Identification of the technique as “discrete”
means that the procurement objective is to obtain a component quantity equal to the net
requirements at a specific point in time. Because component requirements fluctuate, purchase
quantities using discrete lot sizing will vary between orders. Varieties of lot sizing techniques
are available. The options of:
1. Lot-for-lot sizing
2. Period order quantity

3. Time-series lot sizing
Lot-for-lot Sizing

The most basic form of discrete ordering is to plan purchases to cover net requirements over a
specified period. No consideration is given to the cost of ordering under lot-for-lot sizing. In
one sense, the lot-for-lot technique is pure dependent-demand-oriented, since no ordering
economies are considered. The order quantity exactly matches manufacturing or demand quantity.
The basic technique is often used when the item being purchased is inexpensive and the
requirements are relatively small and irregular. Lot-for-lot sizing often uses electronic order
transfer and premium transportation to minimize processing and delivery time.

Period Order Quantity
The Period Order Quantity (POQ) technique builds on the EOQ logic. Here, three steps are
performed to accomplish component procurement. First, the standard EOQ is calculated. Second,
the EOQ quantity is divided into forecasted annual usage to determine order frequency.

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