An Experimental Analysis of the Use of Echelon Holding Costs and Single Stage Lot‐Sizing Procedures in Multi‐Stage Production/Inventory Systems

Abstract

Three simple, single pass multi‐stage lot‐sizing heuristics are examined using simulation. The heuristics are based on using different cost policies in single stage lot‐sizing procedures when applied to a multi‐stage setting. The focus is on the echelon holding cost policy and its performance relative to using “full value” holding costs and McLaren's adjusted setup costs. It is shown that echelon holding costs can lead to an extremely poor overall cost performance. A simple measure that will detect situations for which the echelon holding cost policy is potentially not suitable is suggested and evaluated. Application of the proposed measure results in substantial cost improvements for the echelon holding cost policy; despite this, the policy was outperformed by the MLSA policy in most cases. More research is needed, however, before any conclusive evidence can be presented on the effectiveness of echelon holding costs in multi‐stage lot‐sizing.

Citation

Wemmerlöv, U. (1981), "An Experimental Analysis of the Use of Echelon Holding Costs and Single Stage Lot‐Sizing Procedures in Multi‐Stage Production/Inventory Systems", International Journal of Operations & Production Management, Vol. 2 No. 2, pp. 42-54. https://doi.org/10.1108/eb054680