Lot sizes and setup frequency with learning in setups and process quality

Supporters of the Stockless Production Philosophy have argued that the traditional Economic Order Quantity approach leads to large lot sizes because it does not take into account several important benefits of small lot sizes-benefits such as improved process quality, flexibility, and reduced setup costs due to worker learning, etc. This paper recognizes the benefits of small lot sizes in terms of reduced setup costs due to worker learning and in terms of the improved process quality in the total cost to be minimized. A mathematical analysis and computational results have been provided to study the effect of these benefits on the optimal lot sizes and the optimal setup frequency. To facilitate this, the paper proves several new results and develops algorithms to find the optimal lot sizes.