Explain the three lot sizing methods, and under what circumstances each works best:

a. Lot-for-lot (LFL)
b. Fixed-order quantity (FOQ)
c. Periodic-order quantity (POQ)

An ordering schedule that covers the gross requirements for each week is called lot-for-lot (LFL). The LFL rule minimizes the amount of inventory that need be carried. However, it ignores the costs associated with purchase orders or production setups. Thus, this rule is best applied when inventory carrying costs are high and setup/order costs are low.

The fixed-order quantity (FOQ) rule uses a fixed order size for every order or production run. The rationale for the FOQ approach is that large lot sizes result in fewer orders and setups and therefore reduce the costs associated with ordering and setup. This allows the firm to take advantage of price breaks by suppliers, and to avoid less-than-truckload shipments (which are usually more expensive than full truck loads). However, this creates larger average inventory levels that must be held at a cost and it can distort the true dependent demand gross requirements for lower-level components. Thus, the FOQ model is best applied when inventory carrying costs are low and setup/order costs are high.

The periodic-order quantity (POQ) orders a quantity equal to the gross requirement quantity in one or more predetermined time periods minus the projected on-hand quantity of the previous time period. The POQ approach results in moderate average inventory levels compared to FOQ because it matches order quantities to time buckets. Furthermore, it is easy to implement because inventory levels can be reviewed according to a fixed schedule. However, POQ creates high average inventory levels if the POQ becomes too long, and it can distort true dependent demand gross requirements for lower level components. An economic-based POQ model is best applied when inventory carrying costs and setup/order costs are moderate.