Lot size effects on process lead time, lead time demand, and safety stock

A comprehensive process lot sizing/order point model is developed, in which queueing relationships are used to endogenously model the effects of lot size on the lead time demand distribution. The model is used to examine the effect of shortage penalty on the optimal lot size, when the model reflects job queuing dynamics arising from the lot size decision. A coordinated policy of safety stock adjustment and lead time reduction through lot size adjustment is shown to be more efficient than responding to changes in the shortage penalty parameter solely through adjustment of safety stock.