Lot Sizing

Lot Sizing as a Cash Decision: An EOQ Playbook

Lot size is a money decision disguised as a scheduling habit. This playbook works the order-cycle math, exposes the carrying cost most plants understate by half, and installs the review loop that cuts cycle stock 15 to 25 percent.

Lot size is a money decision disguised as a scheduling habit. Every order carries a fixed cost, setup labor, paperwork, receiving, often $150 to $500 per order, and every unit in the lot carries inventory at 20 to 25 percent of its value per year. Order too often and setup cost eats you; order too rarely and carrying cost does. On a part with 24,000 units of annual demand, the swing between a badly chosen lot of 8,000 and a sound lot of 2,000 can be $15,000 to $30,000 a year on that one part, and a plant runs thousands of parts. Lot sizing is a lever a planner moves with a keystroke that shows up directly in cash.

The practical version starts from order cycles, not the textbook square root. Take 24,000 units of annual demand and a plan to order monthly, 12 cycles: base quantity 2,000 units. Then adjust for reality: a supplier minimum of 2,500, a pallet quantity of 2,160, or a shelf-life limit that caps you at 1,800. The Economic Order Quantity calculator builds the number from annual demand, planned order cycles, and a lot-size adjustment, which matches how plants actually work. Sanity-check with the cost math: at $300 per setup and $2.50 per unit annual carrying cost, 2,000 unit lots cost $3,600 in setups plus $2,500 in average inventory carrying, and you can compare alternatives in minutes.

Calibrate with turns and setup load. Lot sizes yielding fewer than 8 inventory turns on purchased A items deserve a challenge; world-class plants turn raw material and WIP 15 to 25 times. On the production side, a work center spending more than 15 to 20 percent of available time in setup is either over-fragmented or needs setup reduction, not bigger lots. Watch the ratio of lot size to weekly demand: lots above 4 weeks of demand on stable runners are almost always legacy numbers nobody defends. And EOQ math is famously flat near the optimum: total cost rises only about 6 percent when the quantity is 25 percent off, so round to full pallets and clean shift quantities without guilt.

The biggest lever is not the formula, it is the setup cost inside it. Cut a $400 changeover to $100 with SMED and the economic lot drops by half, which halves cycle stock and lead time together; this is why lot-size policy and setup reduction must be one program, not two. Second lever: order cycle alignment, because grouping parts from one supplier into a weekly cycle cuts per-order cost 40 to 60 percent through consolidated freight and receiving. Third: carrying cost honesty. Most plants use 12 percent when the real number with obsolescence, damage, and space is 22 to 28 percent, and understating it systematically inflates every lot in the building.

Failure modes worth auditing: lot sizes set at product launch in 2021 and never revisited while demand fell 40 percent, leaving 10 weeks of stock per order. Minimum order quantities accepted from suppliers without negotiation, then baked into the ERP as if they were physics. EOQ applied to lumpy demand, where a part sells 0 units for 10 months and 5,000 in month 11; use lot-for-lot or period order quantity there instead. Shelf-life parts ordered at economic quantity and scrapped at 15 percent. And phantom savings: cutting lots on non-constraint machines saves inventory, but cutting them on the constraint spends capacity you cannot buy back, so lot policy must know where the constraint is.

Run lot sizing on a review cadence. Monthly: an exception report of parts whose lot size exceeds 6 weeks of current demand or whose demand moved more than 25 percent from the parameter basis; a planner can clear 50 exceptions in a morning. Quarterly: recalculate order cycles on the top 200 parts by spend, renegotiate the 10 worst supplier minimums, and reconcile setup cost standards against actual changeover times. Annually: recompute the carrying cost rate with finance, including this year's obsolescence write-offs, and republish it as the single official number. Plants that install this loop typically cut cycle stock 15 to 25 percent in the first year with zero service level damage.

World-class lot sizing: no active part has gone 12 months without parameter review, lot sizes average under 2 weeks of demand on runners, setup reduction has a funded project on the constraint every quarter, and inventory turns run 15 plus while line-item fill holds above 98 percent. Planners can state the setup cost and carrying rate behind any lot size in the system, and the two numbers match finance's books. Supplier minimums get renegotiated at every contract renewal with the excess-inventory cost quantified in the ask. Lot size stops being folklore and becomes what it should be: a calculation refreshed as often as the demand underneath it changes.

Published 2026-07-02.