The basis for costs in batching decisions

Manufacturing cost functions can be regarded as approximations to the opportunity costs of nonoptimal actions. Thus they depend on the characteristics of the manufacturing process and its underlying cash flows. The authors analyze examples of lot-sizing decisions under different conditions to show that conventional costs models are inappropriate in certain contexts. Improved cost functions for these cases are derived, which reveal insights about the structure of costs. In certain cases, the traditional cost models work, but the cost parameters are quite different from the usual interpretations. In other cases, manufacturing lead time provides a more natural basis for costing than the usual setup and holding cost model.