Computer simulation of lot-sizing algorithms in three-stage multi-echelon inventory systems

This paper evaluates conventional lot-sizing rules in a multi-echelon coalescence MRP system. A part explosion diagram of three levels and twenty-one nodes is simulated using FORTRAN IV Level G. Nine separate lot-sizing methods were evaluated in this analysis. These methods included Lot for Lot, Economic Order Quantity, Periodic Order Quantity, Least Total Cost, Least Unit Cost, Part-Period Balancing, the Silver-Meal Algorithm, and the Wagner-Whitin Algorithm. A hybrid rule using both the Economic Order and the Economic Quantity rules was also evaluated. The analysis required the completion of 1701 separate simulation runs (9 rules×9 demand patterns×21 nodes). The performance of each rule was evaluated on the basis of total annual inventory cost. The Periodic Order Quantity (POQ) rule performed best in six of the nine demand patterns analyzed. In two of the remaining three cases, it ranked second on the basis of minimising costs. The Least Unit Cost (LUC), Least Total Cost (LTC) and Part-Period Balancing (PPB) algorithms demonstrated identical performance in four of the demand patterns analyzed. Generally, they ranked in the upper half of the rules evaluated. The Economic Order Quantity (EOQ) and the Economic Order/Production Quantity hybrid rules performed only moderately well. On the basis of cost, the consistent worst performers were the Wagner-Whitin (WW), Silver-Meal (SM) and the Lot-for-Lot (LFL) rules.