Incorporating the effects of setups in lot-sizing procedures

Since the first formulation of the lot-sizing problem, a large number of procedures have used the trade-off between the setup and inventory costs as the basis for calculation of the size of production orders. Unfortunately, the accounting information available in a manufacturing facility is inadequate to define the precise nature of the setup cost. This paper explores the direct and indirect economic effects of a setup or a teardown in production (internal fabrication or assembly of items) and attempts to put the definition of the ‘costs’ of a setup into proper perspective. It further describes procedures for incorporating the effects of a setup in lot-sizing formulations more realistically.