PRODUCTION & MANUFACTURING RESEARCH

2022, VOL. 10, NO. 1, 494–518

https://doi.org/10.1080/21693277.2022.2092564

Use of DES to develop a decision support system for lot size

decision-making in manufacturing companies
Lukas Buddea, Shuangqing Liaob, Roman Haenggib and Thomas Friedlia
a
ITEM, Institute of Technology Management at the University of St. Gallen, St. Gallen, Switzerland; bIPEK,
Eastern Switzerland University of Applied Sciences, Rapperswil, Switzerland

ABSTRACT ARTICLE HISTORY

There exists a wide range of optimization models in the Operations Received 26 January 2022
Management (OM) community to solve complex problems such as Accepted 16 June 2022
lot sizing. However, their practical performance is often criticized KEYWORDS
due to the complexity of implementation and insufficient applic­ Lot size; smart
ability in real-world decision processes. These theory-driven manufacturing; digital
approaches are either simple to compute, but only focus on single technologies; decision-
aspects of the decision without being able to capture the practical support systems; Design
problem comprehensively, or are complex computational models Science Research
with limited practicability. We apply a Design Science Research
approach to resolve this issue and show how lot size decision-
making models should be designed to thoroughly support man­
agers. Our innovative model combines Discrete Event Simulation
(DES) with OM methods and is developed and tested in a case study
in the metal processing industry. Results reveal that the model is
suitable to provide transparency about effects and a range of
efficient solutions.

1. Introduction and problem statement

Lot sizing decisions are crucial operational key planning activities in manufacturing
companies to minimize changeover and inventory costs while keeping a high service
level (Glock et al., 2014; Jans & Degraeve, 2007). The lot size (batch size) refers to the
quantity of products or parts in one production order that are produced directly one after
the other without an interruption in production. The decision for smaller or larger lot
sizes has to consider the trade-off between flexibility and resource utilization. Lot sizing
decisions thus are crucial to run operations competitively (Bookbinder & H’ng, 1986),
but belong to one of the most complex managerial decision problems in production
planning (Karimi et al., 2003).
Although research on lot sizing is not a new topic, there is still much activity in
developing models to support and optimize lot size decision-making (Boctor, 2022;
Larroche et al., 2021; Zhao & Zhang, 2020). This is due not least to the sustained trend
of mass customization, where manufacturing companies must cope with higher product
varieties and resulting smaller lot sizes (Hu, 2013). Even though it never entirely

CONTACT Lukas Budde [email protected] ITEM, Institute of Technology Management at the University of
St. Gallen, St. Gallen, Switzerland
© 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/
licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly
cited.
 PRODUCTION & MANUFACTURING RESEARCH 495

disappeared, this research topic has been revitalized by new digital technologies and the
rising data availabilities (Wu et al., 2021). Digital twins, big data and analytics are
becoming dominant methodologies for decision-making in manufacturing research
(Martinez et al., 2021; Sahoo, 2021).
The complexity of a lot sizing problem is dependent on the variables considered by
the various models (Karimi et al., 2003). Three main lot sizing problems can be
distinguished: the single-level lot sizing problem (SLSP), the multi-level lot sizing
problem (MLSP) and the capacitated lot sizing problem (CLSP; Bruno et al., 2014).
The characteristics influencing the complexity of the lot sizing decisions can be
distinguished by features such as planning horizon (McClain & Thomas, 1977), num­
ber of production levels (Bogaschewsky et al., 2001), number of products, capacity
constraints (Brahimi et al., 2017), demand type (Bookbinder & H’ng, 1986), item
deterioration (Goyal & Giri, 2001) and set-up structure (Jaber & Bonney, 1999).
Decision-makers are required to deal with this complexity. As demand fluctuations,
number of product variants due to mass customization and the global scattering of
value chain processes increase, this decision problem becomes more important.
However, decision-makers are insufficiently supported, mainly due to a lack of infor­
mation and transparency, a missing link between information and decision-making,
and the resulting effects.
Operations Management (OM) and Decision Support Systems (DSS) literature have
carried out much research to provide optimization models to support decision-making,
resulting in different lot sizing techniques for identifying cost-optimal production lot
sizes, such as the Economic Order Quantity model (EOQ; Harris, 1990), the Wagner–
Whitin-Algorithm (Wagner & Whitin, 2004) and the Silver–Meal heuristics (SMH;
Schulz, 2011; Silver & Meal, 1973). These lot sizing techniques differ from each other
in their consideration of the above-mentioned features. Almost every feature combina­
tion can be found in the literature (see e.g. Brahimi et al., 2017; Drexl & Kimms, 1997;
Glock et al., 2014; Goyal et al., 1993).
Most of the approaches have a single-item and single-level focus, are uncapacitated
and concentrate on cost minimization, thus not sufficiently reflecting operational reality.
Models that consider further features risk becoming unusable in industry practice due to
their complexity (Jans & Degraeve, 2007). Furthermore, both types of approaches (simple
and more complex) have in common that they still primarily focus on local cost
performance criteria (inventory, set-up costs per product), and thus lack a system
perspective with its reflecting impact on global operations. The more complex models
also require a higher diversity and quality of information, leading to an information
overload for many decision-makers.
To address these issues of information overload, complexity of solution, limited
system perspective and guidance in lot sizing decision models, the purpose of this
study is to contribute towards developing a more effective and user-friendly decision
support system for lot size decision-making. Based on a Design Science Research
approach (DSR), we apply Context–Intervention–Mechanism–Outcome (CIMO;
Denyer et al., 2008) methodology to understand the lot sizing problem from
a practitioner’s perspective, implement a solution to the relevant field problem, and
therefore generate prescriptive, instrumental knowledge for optimized managerial deci­
sion-making.
496 L. BUDDE ET AL.

The motivation for this research was the case of a leader in production of fine blanking
parts for the automotive and construction industry. We supported the company in the
optimization of lot sizes, the design of production capacities and the decision-making
process. Based on that we derived the following research question together with the case
company: How can managers be digitally supported to better understand and solve
complex lot size decisions in taking into consideration the trade-offs between conflicting
objectives?
In this paper, we contribute to literature on lot size decision-making by demonstrating
how OM methods can be successfully implemented in practice, when considering
application-oriented specifications from the DSS domain for the solution design. We
develop a Discrete Event Simulation (DES) model, which builds on a real case study
encompassing a multi-item and multistage focus with capacity constraints. We test eight
different lot sizing algorithms to derive optimal lot sizes. Furthermore, we aim to
contribute to the discussion around how digital technologies might change classical
OM concepts, as theory still remains unaddressed. The results reveal six key findings,
which serve as a foundation for future research in lot size decision-making. We use the
results in the specific context of lot size decision-making to abstract from and derive
findings for classical OM decision-making concepts.
To answer the research question of how models for lot size decision-making should be
designed with the integration of digital technologies, this paper starts with an overview of
lot sizing concepts and theory to set a theoretical basis and to reveal the shortcomings of
existing approaches. This knowledge basis is used to identify the main requirements to be
solved by a new model (artifact). Based on this, we introduce the CIMO approach in
Section 3 followed by the model development, implementation, and evaluation in
Section 4. Subsequently, Section 5 discusses the managerial and theoretical implications,
limitations and points out future research activities. Section 6 concludes the paper.

2. Review of concepts for lot sizing decision-making utilizing digital

technologies
2.1. Lot size decision-making and decision support requirements
The optimal determination of lot sizes in production planning is a complex decision
problem encompassing demand, orders, capacities, delivery times, multiple products and
process flows as well as costs (Brahimi et al., 2017). The objective of lot sizing models is to
determine an optimal production plan to satisfy demand at minimal costs (Glock et al.,
2014). A company that must fulfil customer demands needs to decide when and where,
how much and in which sequence to produce and purchase.
Several reviews about lot sizing techniques have been published and reveal the range
of existing problem solutions in this important field of operations research and
management (Andriolo et al., 2014; Baciarello et al., 2013; Brahimi et al., 2017;
Glock et al., 2014). The lot sizing techniques vary in their object of investigation and
thus in the information needed to determine optimal lot sizes. Many of the models
addressing the static lot sizing problem are single-item and single-stage uncapacitated
(SLULP) approaches because of their simplicity of application (Van Hoesel &
Wagelmans, 2001). Extended models and heuristics consider multiple items and levels
 PRODUCTION & MANUFACTURING RESEARCH 497

with capacity limits but are more complex (MLCLSP) and difficult to apply in practice
(Billington et al., 1983). A performance comparison of different lot sizing methods
reveals respective weaknesses and suitable application areas (Baciarello et al., 2013;
Buschkühl et al., 2010; Jans & Degraeve, 2007; Van den Heuvel & Wagelmans, 2010).
They mostly concentrate on minimizing costs. Other strategic objectives such as
productivity or service levels remain insufficiently examined or entirely unconsidered.
There is a need for hybrid optimization models combining modelling and algorithms
(Jans & Degraeve, 2007).
These issues imply that DSS for lot sizing should allow for the computation of a range
of trade-offs including additional targets, such as throughput, utilization, quality, and
delivery rates. DSS is focused on the development of IT-based systems to substantially
strengthen decision processes (Arnott & Pervan, 2016). Within DSS, the goal is to
optimize the manager’s performance in decision-making processes, measured by deci­
sion time, confidence, and total cost. Decision-making styles vary from manager to
manager and require different tools to enable effective decision-making. In this article,
we rely on Personal Decision Support Systems (PDSS), which belongs to the subset of
DSS developing problem solutions to support a specific decision task, such as lot size
decision-making. Therefore, we selected four different guidance mechanisms that are
relevant for managerial decision support: the form (Arnold et al., 2004), the mode
(Parikh et al., 2007), the intention (Arnold et al., 2004), and the format of decision-
guidance (Gregor & Benbasat, 1999; Morana et al., 2017).
Creating value from a growing real-time database is hereby the key for success for
various decision-making situations (Kobbacy & Vadera, 2011). Data in diverse enterprise
systems are becoming available for analysis in ever-increasing volumes and velocities
(McAfee & Brynjolfsson, 2012). ‘The shared decision-making activity between a manager
and a computer that is fundamental to DSS is highly compatible with the big data
concept’ (Arnott & Pervan, 2016). Visualizations combined with intelligent scenario
simulations drive decision-making towards a company optimal perspective and will
increase the autonomy in different decisions and activities in a factory (Osterrieder
et al., 2019).
To achieve this, quantitative optimization such as EOQ or Groff heuristics must be
complemented with other methods that can handle and visualize diverse data types
(Groff, 1979; Mickein et al., 2022). Digital technologies encompassing data capturing
(e.g. IoT, Sensors, Track & Trace, etc.), data transmission and storage (e.g. 5 G, edge
computing) and analytics (big data, artificial intelligence) provide these features to make
use of big data and support operational decision-making. The DES is flexible with
incorporating different OM methods while providing an understandable and simple
visualization. The next section provides an overview of such lot sizing approaches in
the literature.

2.2. Characteristics of existing lot sizing methods

Determination of the optimal lot size can be a difficult problem to solve. Different models
have been developed and extensively studied. These models differ in their included
features and the resulting computational complexity (Jacobs & Chase, 2014). Features
include computational set-up, the number of products simultaneously considered (single
498 L. BUDDE ET AL.

or multiple items), the production system levels (single or multiple stages), capacities and
different demand types. Diverse feature combinations can be found in the literature
(Andriolo et al., 2014; Beck et al., 2015; Brahimi et al., 2017; Helber & Sahling, 2010).
Lot sizing models can be categorized as belonging to one of three programming types:
static, periodic, and dynamic. Static lot sizing techniques define a fixed order quantity
(FOQ), order the precise amount needed to fulfil the forecasted demand, known as Lot
To Lot (LTL) or define an order quantity that minimizes the total holding and ordering
costs (EOQ; Andriolo et al., 2014; Harris, 1990). Periodic lot sizing techniques use the
demands of different periods to define lot size, such as the Fixed Order Period (e.g. FOP).
Dynamic lot sizing concepts such as Silver–Meal heuristics (SMH), Part Period Balancing
(PPB), Least Unit Cost (LUC) and Groff (GMR) consider the cumulated forecasted
demand throughout the entire time horizon to define optimal lot sizes (Beck et al.,
2015; Brahimi et al., 2017). As time goes by and the production demand changes, plans
may be adapted accordingly (Beck et al., 2015; Buschkühl et al., 2010). Dynamic models
require a more complex computation compared to static lot sizing techniques (Florian
et al., 1980).
Single-item models encompass only one item (e.g. final product) in the production
planning, whereas in multi-item production systems, several items exist (Karimi et al.,
2003). The single-stage characterizes a production system where the final product is
simple and raw materials are directly processed by one continuous operation into the
final product, as in a casting process (Karimi et al., 2003). More complex models cover
a multistage production system, in which raw materials are processed in different
operational steps to produce the final product.
Furthermore, many models are uncapacitated. These models do not consider the
resources in a production system such as manpower, equipment, and machines
(Aggarwal & Park, 1993; Wagelmans et al., 1992). This reduces the complexity of
computation and the effort to gather the needed information about the capacities
(Florian et al., 1980) with the downside of incompletely capturing the decision-problem.
Extensions of these basic lot sizing models also exist, including multistage production
systems (Bogaschewsky et al., 2001; Glock, 2011), productivity (Jaber & Bonney, 1999),
and the determination of safety stocks (Glock & Ries, 2013). Heuristic solution proce­
dures use the properties of the static models to find a good solution (Hindi, 1996;
Kohlmorgen et al., 1999). Meta-heuristics such as tabu search (TS), simulated annealing
(SA), and genetic algorithms (GA) receive more attention because of their flexibility and
ability to solve complex problems (Jans & Degraeve, 2007) with (Barbarosoğlu &
Özdamar, 2000) and without capacities (Dellaert et al., 2000; Kuik & Salomon, 1990).
Furthermore, existing models differentiate themselves by demand type: deterministic
or stochastic. In deterministic demands models, the demand is known in advance,
whereas in stochastic cases, the demand values are based on probability distributions
(Brahimi et al., 2017; Karimi et al., 2003). Lot sizing techniques also differ in the
considered length of demand horizons used to compute optimal lot sizes (Bookbinder
& H’ng, 1986).
A common missing feature in existing models is the practical implementation of lot
sizing models in decision-making processes. Models focus on cost minimization, and
often neglect other strategic targets, thus failing to capture the entire managerial deci­
sion-process. Thus, while design principles are well researched, this remains an issue in
 PRODUCTION & MANUFACTURING RESEARCH 499

the OM literature. In addition, these models do not sufficiently cover the opportunities
enabled by digital technologies, such as data availability that allows the building of new
models to support and automize decisions in operations.
The presented literature indicates that a combination of DES and OM methods with
the rising opportunities around digital technologies and data availability can be helpful to
solve lot size decision-making problems (Martinez et al., 2021; Sahoo, 2021). To answer
our research question, we deploy a solution model integrating the introduced methods in
the context of a practical case, using a DSR approach. Our solution model considers the
identified issues (limited system perspective, complexity of solutions, cognitive limita­
tions, etc.) and limitation of existing research to overcome these issues. Table 1 shows
a summarizing overview of these findings and provides directions for detailed definitions
of the different lot sizing techniques. The applied methodology is explained in Section 3.

3. Research methodology
3.1. CIMO Logic
To develop a new body of prescriptive knowledge for lot size decision-making and to
show its usefulness in a practical case, we opt for a research design that follows DSR
principles. The goal of DSR is to extend organizational and human capabilities through
the creation of a new artifact (Henfridsson & Bygstad, 2013).
The DSR process is based on existing theory and uses this knowledge to inform design
(Gregor & Hevner, 2013). Descriptive as well as prescriptive knowledge is considered to
inform the researcher about the object of investigation and the design process. Many variants
of reference processes and ways to conduct a DSR exist (Dresch et al., 2014). In this research,
we choose the CIMO-approach due to its strength in extending alternative applications of
design proposition thinking to consider contextual specificities (Denyer et al., 2008).
First, we describe the problem in-Context (the C in CIMO), which is represented by
the underperformance of existing manufacturing (e.g. utilization) due to suboptimal lot
size determination and the inadequacy of managerial practices and mechanisms to
address it. Next, we continue with the description of the Intervention (the I in CIMO)
by the scientific team and the managers, containing the design of the decision support
model by applying the discrete event simulation methodology combined with eight
different analytical methods. Based on that, we develop a Mechanism (the M in CIMO)
to support managers in their decision-making process concerning the lot size determina­
tion in production planning. The Outcome (the O in CIMO), and thus the observable
improvement of this decision-making, is subsequently described. In this paper we use
simulation experiments and qualitative expert discussions as evaluation methods. The
emphasis in this paper is on knowledge transfer and process transformation rather than
the efficiency gains due to the application of scientific methods.

3.2. Data overview

In order to understand the case company’s problem and solution requirements, several
semi-structured interviews and workshops were conducted. Information about product
specifications, production processes (working plans), machine characteristics and
 500

Table 1. Review of lot sizing approaches.

Lot for lot Multi-level
Fixed (discrete Economic Silver– Capacitated capacitated
order order order Wagner– Meal Part period lot sizing lot sizing
quantity quantity) quantity Fixed order period Within heuristics balancing Least unit problem problem
(FOQ) (LTL) (EOQ) (FOP) algorithm (SMH) (PPB) cost (LUC) Groff (GMR) (CLSP) (MLCLSP)
Jacobs Jacobs Harris Jacobs and Chase Wagner and Silver and Baciarello et al. Baciarello Groff (1979); Beck Dixon & Billington This paper
L. BUDDE ET AL.

and and (1990); (2014) Whitin Meal (2013); Van et al. et al. (2015) Silver (1983);
Chase Chase Andriolo (2004); (1973); den Heuvel (2013); (1981); Helber and
(2014) (2014) et al. Jans and Schulz and Brahimi Bruno Sahling
(2014), Degraeve (2011) Wagelmans et al. et al. (2010);
Glock (2007) (2010) (2017) (2014); Mickein
et al. Wu et al. et al., 2022;
(2014) (2021) Zhao &
Zhang,
2020
Problem type SLULSP SLULSP SLULSP SLULSP SLULSP SLULSP SLULSP SLULSP SLULSP CLSP MLCLSP MLCLSP
Considers x x x x x x x x x x
inventory
costs
Considers x x x x x x x x x x
order or
set-up
costs
Considers x
service
level
Considers x x x
capacity
constraints
Considers x x x
multiple
products
Considers x x
multi-level
production
(Continued)
Table 1. (Continued).
Lot for lot Multi-level
Fixed (discrete Economic Silver– Capacitated capacitated
order order order Wagner– Meal Part period lot sizing lot sizing
quantity quantity) quantity Fixed order period Within heuristics balancing Least unit problem problem
(FOQ) (LTL) (EOQ) (FOP) algorithm (SMH) (PPB) cost (LUC) Groff (GMR) (CLSP) (MLCLSP)
Integrates x x x
different
objectives
into
a single
decision
Visualizes x
trade-offs
and effects
of
decisions
and
between
objectives
Analytical/ x x x x x x x x x x
statistical
approaches
Dynamic x
simulations
SL, single-Level; ML, multi-level; U, uncapacitated; C, capacited; LSP, lot sizing problem.
PRODUCTION & MANUFACTURING RESEARCH
501
502 L. BUDDE ET AL.

Table 2. Overview of data case company.

Step Purpose Data item Source
Understanding of Overview of the current situation, Three interviews with problem Supply Chain
problem and identify the problem, define the owner, discussion of current Manager, Head
scope of objective (KPIs) and decisions to problems such as delay in of Operations,
researcher make delivery, low throughput rate CEO, COO
involvement
Design of the Data collection to understand the Receiving data and explanations ERP system,
model decision-making process, from problem owner, continuous Supply Chain
production processes and communication about model Manager and
sequences for the different design Head of
products Operations
To model the customer demand Sales data: during the last 3 years ERP system
pattern
To calculate on-time-delivery (OTD) Targeted lead time ERP system
To model the material flow Production process definition: ERP system and
operations sequence and the Head of
specific processing times, set-up Operations
times
To calculate costs Costs: resource hourly rate, product ERP system
yearly inventory cost
To model system capacity Resource capacity: machine amount, ERP system
working schedule
To calculate the performance of Current production planning ERP system and
current lot size strategy method and current lot-sizes Head of
Operations
Application of the Comparison of previous state and Interview about solution feasibility Supply Chain and
model improved state, discussion about and implementation Operations
solution and the performance Manager
(KPIs) of solution
Evaluation and Receive feedback from problem Final interview with problem owner Supply Chain and
refinement owner about our solution Operations
approach. Evaluate the solution Manager
regarding decision-support and
outcome.

capacities, costs, and sales for the last three years were collected and analysed in detail to
understand production and the related planning. We combined quantitative data sourced
from IT systems with qualitative knowledge from the experts from the case company to
generate transparency about production flows, planning activities, decision-making and
the corresponding performance. Interviewees included the purchasing and supply chain
manager together with the head of operations. A data overview is provided in Table 2.
Evaluation and generalization are central to a DSR approach. In this study we follow
the guidelines of O’Keefe (2014). To demonstrate the utility and validity of the presented
solution, jointly with the case company, we evaluated the construction and testing and
analysed the intervention results. To further validate the usefulness of the solution and to
enable a generalization of the specifications to other contexts, we conducted interviews
with four top operation managers in international companies from diverse industries
(Venable et al., 2012). An overview about these interviews is provided in Table 3.

Table 3. Overview of interviews outside the case company.

Company Position Industry Size (employees) Duration (min)
Company A Head of Operational Excellence & Projects Glass production ca. 16,000 90
Company B Head of Production Spring production ca. 300 45
Company B Head of Operational Excellence & Projects Spring production ca. 300 60
Company C Lean Manager Measuring Equipment ca. 500 120
 PRODUCTION & MANUFACTURING RESEARCH 503

4. Deploying CIMO-logic and evaluation

4.1. Context
The case company is a technology leader in the production of fine blanking parts for the
automotive and construction industries. It produces 12 main products with 28 production
processes (e.g. fine blanking, pressing, heating, surface mounting, grinding, polishing and
final assembly) with around 100 employees in production and planning. Each product goes
though the production process sequences following a specific operations plan. Demand
arrives at the beginning of each month. The yearly planned demand is known 6 months
ahead; monthly real demand is normally known 3–5 weeks ahead. Demand can also vary
due to short notice changes by customers. The production planning is organized as follows.
No safety stock is planned. Rather, when a new order leads to negative inventory,
production is trigged. Batch production results in a new inventory level, from which
customer orders are fulfilled, until a new order leads to another negative inventory level.
Recently, the company has faced several challenges, such as high-cost pressure and
short delivery times, which have endangered profitability. Constant cost optimization
programs helped the company to survive. The delivery situation recently worsened due to
strong demand variations driven by the global corona crisis. Management had little
transparency about production and delivery performance due to constant reprioritiza­
tion of orders. These constant changes to the operation plans drove the company to split
and overlap orders, resulting in partial shipping to customers. The ERP System could not
properly handle all these changes due to many manual and off-system actions. The
company’s data quality of the actual production situation worsened daily. This ultimately
created significant delivery issues with customers.
Based on semi-structured interviews with operations managers, the COO and the CEO
together with data analyses, reasons for poor performance have been revealed and locations
for optimization identified. Large lot sizes generated the need for reprioritization of orders
including respective measures to partially meet customer delivery needs. Improvement in
capacity management including order sequencing became critical as transparency was
missing. To optimize the decision process for lot sizes and improve resulting KPIs (e.g.
throughput, on-time delivery), tools other than the static ERP system were needed to
provide analytical capabilities, at the same time remaining transparent and usable.

4.2. Intervention
4.2.1. Design requirements from the case study
Our role was to develop and implement a decision support system based on scientific
methods for optimizing lot size decision-making in production planning. The target was
to design an assistant system in close collaboration with the company (the problem
owner) that could be handed over and applied after our collaboration.
The main requirement from the company was that the solution model encompass
the ability to generate a digital copy of their production process flows. It must include
all relevant quantitative information, such as demand, capacities, inventory costs,
resource hourly costs, processing time and set-up time. It was important for the
company that the solution provides a solid basis for discussion and collaboration
504 L. BUDDE ET AL.

between different functional departments. Therefore, the solution must be able to

visualize causes and effects to help stakeholders better understand problem and the
results of their decisions.

4.2.2. Design requirements and empirical justification

Based on the introduced knowledge about lot sizing concepts, as a first step we must
collect requirements for our DSS. These design requirements (DRs) are based on con­
siderations in OM and DSS and the expert interviews with our case company. Both
domains look at the same problem from different perspectives. OM focuses on modelling
real-life problems as closely as possible and delivering feasible and optimal solutions.
Approaches should consider quantitative and qualitative data, be multi-objective and
provide trade-offs between conflicting goals. DSS on the other hand focuses on the
application, the decision-making process itself. Researchers in this domain provide
insights and mechanisms on how to guide decision-makers, and on the interfaces
between the tools and the managers. A summary of the derived design requirements
from OM and DSS literature can be found in Table 4. The different design requirements
have been validated with the case company and with the interview partners of the other
selected companies facing similar challenges. Figure 1 illustrates how each design
requirement is addressed in the artefact’s design principles.

4.3. Mechanism
4.3.1. Choice of methods
Our solution model has at its core a Discrete Event Simulation (DES) method and
combines it with established OM lot sizing methods to fulfil the derived design require­
ments stated previously. This solution model allows the user to optimize lot size for
different strategic objectives. Results and effects are presented in a 3D-animation includ­
ing performance evaluation of different strategies.
We chose DES as our solution method, as it models complex environments or systems
where events occur in sequence. DES is one of the most frequently applied simulation
techniques for manufacturing processes (Negahban & Smith, 2014). DES allows users to
perform analyses of system characteristics, identify bottlenecks of process flow and
compare the performance of various decisions before the system is actually built or
modified.
In this study, we selected eight lot sizing techniques that are established in the
literature. As our focus is not the lot sizing technique itself, but the decision-making
process, other lot sizing techniques could be implemented as well.
This approach allows us to integrate different OM methods to implement a multi-
objective optimization for a complex problem, in this case, lot size decision-making with
simultaneous production of simple and clear effect and performance visualizations for
stakeholders. These visualizations serve as a basis for discussing the range of different lot
sizing strategies. Figure 2 shows our solution approach, including the way the methods
are applied.
 PRODUCTION & MANUFACTURING RESEARCH 505

Table 4. Design requirements from OM and DSS.

Supporting
Domain Derived design requirements (DR) literature Empirical validation
From Operations DR1: Model the problem as real as Brahimi et al. ‘Information about demand patterns,
Management possible (2017), trends, risks, capacities, products
(OM) literature (Drexl & and process flows as well as order
Kimms, status need to be considered’ – Head
1997) of Production, Springs
DR2: Consider multiple objectives and Florian et al. ‘We need to see the effects on different
information sources (1980), KPIs to decide on the optimal lot
Aggarwal size, not just the costs perspective’ –
and Park Head of Production, Springs
(1993)
DR3: Identify feasible and optimal Glock et al. ‘We need to consider real-time data for
solutions compute trade-offs (2014) capacities, order status, processing
between conflicting goals times to derive optimal solutions’ –
Head of Operational Excellence, Glass
From Decision DR4: Consider a broader system Form of ‘We have to get away from lot size
Support perspective and show the value of guidance discussions only focused on
Systems (DSS) respective lot sizes to make (Morana inventory and set-up costs, we have
literature informed lot size decisions et al., 2017) to establish a broader, more holistic
decision perspective’, ‘MRP systems
are limited to single-products and
single-stage considerations.’ – Head
of Production, Springs
DR5: Decrease the complexity of lot Intention of ‘We have to integrate more
size determination for managers guidance information, to facilitate better
(Arnold decision-making and have to make it
et al., 2004) understandable at the same time’ –
Lean Manager, Measuring equipment
DR6: Provide an understandable Format of ‘The challenge is to show a complex
visualization of effects and guidance problem in simple way, so that
interdependencies to all (Gregor & stakeholders can make use of it’ –
stakeholders Benbasat, Head of Production, Springs
1999)
DR7: Foster a cross-functional decision- Participative ‘If we are able to visualize a broader
making discussion to decide on the guidance system perspective, this will allow us
final option (Morana to integrate other operational
et al., 2017) decisions such as make or buy,
product allocations, etc.’ – Head of
Production, Springs
DR8: Enable a learning form decision Dynamic ‘Transparency about effects of
guidance decisions, will bring learning and
(Morana cross-functional collaboration on
et al., 2017) another level’ – Head of Operational
Excellence & Projects, Glass

4.3.2. Model design and application

First, we choose and collect necessary information inputs. As we know from existing lot
sizing techniques, included features dictate which specific information about products
(e.g. bill of materials, process sequences, sequencing rules, buffers, etc.) and costs (set-up,
holding and processing for each single product) are required. The information was
gathered from the ERP system and complemented with semi-structured interviews
with the company’s operations manager, as described in Section 3.2.
Figure 3 provides an overview of the decision support system for lot sizes of the case
company including the simulation of the production process: inputs, process map,
decisions, and outputs. The whole process includes three departments: sales, inventory
management and production. As shown in the processes map, first, customer demand
506 L. BUDDE ET AL.

Figure 1. Mapping of design requirements (DRs) and design principles (DPs).

arrives monthly and is entered into the demand database (demand queue). Then inven­
tory levels are checked to identify whether products required by the demand are available
and can be delivered immediately. If yes, the products are delivered to customers and the
demand is filled. If not, the demand stays in the demand queue, and production planning
and production processes are triggered. Production planning implements a certain lot
size technique, considering the projected inventory level and relevant costs, to determine
the lot sizes. Thirdly, when the production process of a new batch is completed, it enters
the inventory. The corresponding on-hand inventory levels and projected inventory
levels are updated. Pending demands are checked to see what can be filled thanks to
the arrival of the new batch. The material and information flows, such as demand arrival,
production, and delivery, are modelled as discrete sequences of events. The queue levels
of demand orders, materials and final products are simultaneously modelled.
 PRODUCTION & MANUFACTURING RESEARCH 507

Figure 2. Solution approach.

Figure 3. Decision support system with discrete event simulation model of production process.

In the sales department, 3 years’ historical sales data and the targeted lead time are
used as input data. We consider six different demand patterns using information from
historical demand: (a) historical data; (b) constant demand; (c) normally distributed
demand; (d) uniformly distributed demand; (e) demand with seasonality; and (f) demand
with high fluctuation. As outputs, the total demand and pending demand are computed.
KPIs such as customer satisfaction and throughput (hourly delivered amount) are also
calculated.
In the inventory management department, yearly inventory costs for all products are
inputs. As outputs, the on-hand inventory levels, projected inventory levels and hourly
inventory costs are calculated.
508 L. BUDDE ET AL.

In the production department, inputs are production process information: operations

sequences for the 12 types of products, processing time, set-up time, resource hourly rate,
resource capacity for the 28 processes, and current lot-sizes. All machines run two-shifts
(18 hours) per working day operation. The monthly demand, inventory cost, set-up cost,
and original lot size for each product are presented in Table 6. For each process,

● The processing time depends on the respective specific processes and products.
● The set-up time depends on the processes but not on products.
● The FIFO rule is followed in choosing the next batch.
● For a given batch, a processing step is always completed before the next step is
started.

The decision-maker sets the strategic objectives, which vary according to the com­
pany’s global strategy. According to the strategic objectives, we define the corresponding
KPIs and acceptance criteria together with the management team. In our study, the
following four KPIs are considered to be important:

(1) Hourly costs: production and inventory costs;

(2) Resource utilization: the utilization of each machine is (set-up time + process
time)/(set-up time + process time + idle time);
(3) Throughput: hourly produced and hourly delivered amounts (for the whole plant)
are the corresponding total amount divided by the time simulated;
(4) Customer satisfaction: Fill rate that is ‘delivered amount/demanded amount’, and
OTD rate that is ‘on time amount delivered/amount delivered’.

Based on the various data inputs and interdependencies between the different func­
tional departments and related processes, we combine the simulation with existing OM
methods to support lot size decision-making. Different lot size techniques are imple­
mented in the simulation model. When a decision-maker decides on a specific technique,
the production decisions (lot sizes and lots amounts) and the resulting KPIs, such as
hourly production costs, resource utilization and throughput (hourly produced amount)
and customer satisfaction, are calculated.
We have selected eight lot size techniques, which are commonly introduced in
literature (see also Section 2), require fair computational effort and are simple to under­
stand. We classify the strategies in two groups: I. Non-cost-oriented strategies: Fixed
order quantity (FOQ) and Lot for lot (Discrete order quantity) (LTL). II. Cost-oriented
strategies: Economic order quantity (EOQ), Fixed order period (FOP), Silver–Meal
heuristics (SMH), Part period balancing (PPB), Least unit cost (LUC), Groff (GMR).
When implementing static lot sizing techniques such as Fixed Order Quantity (FOQ), it
is possible that the decision-maker sets the order quantity manually. In our simulation we
implemented the following lot sizes: current lot size, monthly average demand, half,
twice, three times and four times current lot size. When implementing the LTL techni­
que, we consider a lot size equal to the exact amount that matches the current net
demand or for 0, 1, or 2 periods later. When implementing other lot sizing techniques,
the system calculates the lot size according to the appropriate formula. Denote the
 PRODUCTION & MANUFACTURING RESEARCH 509

quantity to be produced by Q, yearly demand by D, demand of month t by dt , set-up cost

by A, yearly holding cost by H, and number of periods covered by n. The sum of the
production set-up cost and the holding cost of products for the next n periods is

X
n
CðnÞ ¼ A þ H ðt 1Þdt ; (1)
t¼1

pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
EOQ : Q ¼ 2AD=H ; (2)
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
FOP: Fixed order period is given by n and it is calculated by the formula “ 2AD=H
D*12’”; (3)

CðnÞ
SMR : kðn þ 1Þ > kðnÞ; kðnÞ ¼ ; (4)
n

X
nþ1
PPB : ðt 1Þdt � A; (5)
t¼1

C ð n þ 1Þ CðnÞ
LUC : Pnþ1 � Pn ; (6)
t¼1 dt t¼1 dt

GMR : HA=ðnðn þ 1ÞÞ: (7)

In the last step, we run the model for a sufficient length of time and with replications if
uncertainties exist. The performance regarding the achievement of the strategic objec­
tives of different scenarios are measured and compared. Based on this, the decision-
maker can choose the most suitable scenario for actual implementation.
We use the program SIMIO (version 12) to build the DES model, which models the
above-mentioned data, processes, and strategies. Compared to reality, our simulation
model contains some simplifications. Our case company agreed with these changes. We
model the processes without considering machine and material failures and walking time
between resources. One of the 28 processes is an external process heat-treatment, which
is modeled as having infinite capacity and always delivering on time. The model was
randomly paused during serval runs and each component was checked to ensure con­
sistency with the flow diagrams. Model validation was conducted to compare with the
case company’s real performance.
By running experiments with different parameter settings in a time length of 2.5 years,
the decision-makers receive an overview of the performances from different strategies
and can choose the one that performs the best with regard to the self-chosen KPIs.
Selected experiment results are summarized in Tables 5 and 6. Further performance
results for other demand patterns can be provided by the authors upon request.
510 L. BUDDE ET AL.

4.3.3. Results from the application

We calculate a total of 15 different scenarios including all 12 product types of our case
company. In our simulation experiments, we consider six different demand patterns
from actual demand (historical data, constant demand, normal distribution, uniform
distribution, with seasonality, with high fluctuations).
Overall, scenario 1.3 (fixed order quantity with 0.5*current lot size) has the
highest throughput (hourly delivered) rate, fill rate and OTD rate. At the same
time, it has the lowest bottleneck resource utilization rate, and relatively low hourly
cost and inventory levels. Scenario 1.1 (with current lot size) has similar perfor­
mance. According to the targets of our case company, scenario 1.3 is the most
suitable scenario to address the existing issues such as low OTD, throughput and
customer satisfaction.
It is worth mentioning that, as shown in Table 6, the lot sizes calculated by classic
strategy EOQ are much larger (c.a. 10 times) than the best performed lot sizes (FOQ: Q/
2). Comparing scenario 1.3 with scenarios 3–8 in Table 5, we can see that the classic lot
sizing strategies have significant worse performances: much higher costs, inventory and
bottleneck resource utilization, at the same much lower OTD. This underlines the
effectiveness of our decision support system.
Figure 4 shows a performance example produced by our simulation model. The first
12 rows contain states of inventory levels and production planning for the 12 different
products, while the second 12 rows list the states of throughput and customer satisfac­
tion. Other KPIs such as costs and resource utilization are similarly displayed by our
model.
With our decision support system, we helped the company to increase its on-time-
delivery rate by 17%, thus increasing delivery reliability, enhancing company reputation,
and increasing customer loyalty, and consequently, contributing to an increase in
demand. The inventory level reduced by 20%, which reduced working capital. Overall,
we estimate an EBIT improvement of 3%.

Table 5. Lot sizing strategies performance in the case company.

Hourly cost Hourly throughput Customer
(CHF) Utilization rate (product units) satisfaction
Sc. Strategy-lot size Total Inventory Average Bottleneck Produced Delivered Fill rate OTD rate
1.1 FOQ: Q 241.0 0.5 14% 72% 2,523.5 2,526.0 100% 80%
1.2 FOQ: Monthly average 241.7 0.7 15% 94% 2,499.9 2,496.9 99% 57%
1.3 FOQ: 0.5* Q 241.1 0.4 13% 65% 2,511.2 2,526.6 100% 97%
1.4 FOQ: 2* Q 243.2 0.7 15% 84% 2,521.1 2,487.4 98% 43%
1.5 FOQ: 3* Q 244.9 0.8 15% 90% 2,519.6 2,480.0 98% 35%
1.6 FOQ: 4* Q 245.4 1.0 15% 96% 2,573.4 2,501.2 99% 42%
2.1 LTL 0 242.6 0.4 15% 92% 2,496.9 2,496.9 99% 45%
2.2 LTL 1 238.9 0.9 15% 91% 2,471.7 2,442.8 97% 22%
2.3 LTL 2 238.8 1.0 15% 91% 2,424.9 2,368.9 94% 21%
3 EOQ 479.4 11.4 28% 100% 5,291.6 2,526.6 100% 81%
4 FOP 625.5 8.3 37% 100% 3,780.4 2,327.2 92% 60%
5 SMH 632.9 9.5 37% 100% 4,087.9 2,448.4 97% 59%
6 PPB 629.6 9.3 37% 100% 4,073.5 2,448.4 97% 62%
7 LUC 639.9 9.7 37% 100% 4,359.4 2,467.1 98% 66%
8 GMR 631.0 9.4 37% 100% 4,105.2 2,448.4 97% 60%
 PRODUCTION & MANUFACTURING RESEARCH 511

Table 6. Product basic data and lot sizes for strategies 1.3 and EOQ.
Basic data Lot sizes
Yearly
Product Monthly demand Monthly inventory costs Set-up costs FOQ: Q/
number mean demand STD (CHF/Pcs) (CHF) FOQ: Q 2 EOQ
1 334,124 163,156 0.007219 363.0 120,000 60,000 635,012
2 328,426 124,883 0.007219 341.0 120,000 60,000 610,199
3 133,276 124,551 0.004125 605.0 180,000 90,000 684,932
4 206,572 111,435 0.007219 363.0 120,000 60,000 499,303
5 205,092 90,024 0.007219 341.0 120,000 60,000 482,200
6 201,789 71,641 0.014438 341.0 100,000 50,000 338,210
7 34,960 41,460 0.009625 284.9 72,000 36,000 157,593
8 108,001 75,968 0.002406 581.9 200,000 100,000 791,724
9 100,968 58,652 0.001444 581.9 200,000 100,000 1,397,117
10 70,571 43,162 0.007219 363.0 60,000 30,000 291,838
11 71,089 40,875 0.007219 363.0 60,000 30,000 292,907
12 51,737 36,456 0.009625 308.0 36,000 18,000 199,334

Figure 4. Example of KPIs displayed in the simulation model.

4.3.4. Outcome and evaluation

The DES provides transparency about the effects of different lot sizing techniques on
performance factors. Managers are equipped to visualize effects, trade-offs, change assump­
tions and calculations, discuss alternatives, and eventually select the lot size best suited to
their strategy. Evaluation in DSR is a central and essential step in conducting rigorous DSR
(Venable et al., 2012). It is used to provide evidence that the newly designed artifact
achieves the purpose for which it was designed (March & Smith, 1995). We consider the
evaluation criteria from Venable et al. (2012). To test these, we use simulation experiments
and a semi-structured interview to evaluate our model and the formalized knowledge.
The case company interview was conducted with an expert in production planning,
who has worked for several manufacturing companies in their planning departments.
Thus, considerable familiarity with topics around scheduling, lot sizing and IT systems
was assured. The expert discussions took place during the design phase of the model to
512 L. BUDDE ET AL.

gather the requirements and to reflect and evaluate design elements before the final
model is used by the company to investigate if the purpose can be achieved. The results
are presented below.

(1) Define data inputs: The expert from the company sees the various data inputs as
important sources to establish a holistic perspective. Although today there are still
holes in the data due to missing connectivity or data layer, to build the model it is
worthwhile gathering and integrating the most important data fields for the lot
size decision, such as machine data, process data, capacities, set-up times and
costs. ‘There should be an adequate effort benefit ratio for the data generation.
Digital technologies will further lower the transaction costs in the future.’ This
supports our design principles DP1 and DP4.
(2) Set strategic options: This is a feature that allows a user to select specific objectives
in addition to costs, such as delivery reliability. ‘This design feature is important
for the expert to foster strategic discussions, which haven’t taken place in the past.’
This supports our design principle DP1.
(3) Process model visualization: Visualization is seen as the most important feature of
the model to create acceptance and to enable fact-based discussions. The classical
MRP 1 and 2 are usually not accessible enough to create foundational system
understanding and do not show the effects of certain decisions. ‘In production
there often exist a high variety and level of competences (from apprenticeship to
PhD), where a formula-based model is not the adequate way to create a common
understanding and beliefs, to influence behaviour and decision-making.’ The
formulas are seen as black boxes and do not foster a real system understanding.
This leads to the fact that in many cases an individual is not aware of the
consequences of its decision for the system (in this case the entire company).
Through this simulation model, the consequences become visible. This supports
our design principle DP 2 and DP5.
(4) Analytic techniques and performance: To have different options for optimization
is always welcome, but individuals need to see and feel the effects in operations.
‘There will be a capacity problem at machine B, or this will lead to a lower
utilization at machines C, D, E, and we will have longer waiting times for the
orders 15, 16, 18.’ The development of scenarios fosters a system understanding
and drives decision-making towards a more system-oriented perspective. This
supports our design principle DP3.
(5) Linkage to related decisions: This is an important feature of the model, as it can be
a ‘game changer’ for certain other decision types. One example the expert
explained to us is related to long-term resource planning, which is always done
when a new customer request comes in. In this planning process, a rough calcula­
tion to investigate the ability to fulfil the customer request is conducted.
Operational lot sizes and customer lot sizes are not considered at this point in
time, which lead to the problem that, in some cases, the rough planning is
operationally infeasible. If a lot size perspective can be integrated in the early
customer request process, the company can considerably benefit from and reduce
the number of not feasible customer requests. Besides the integration of lot size in
this perspective, there are also further beneficial relations to other decisions, such
 PRODUCTION & MANUFACTURING RESEARCH 513

as make or buy and customer lot sizes. The expert told us that the combination of
the three different perspectives such as customer lot size, purchasing lot size and
the internal operational lot size would help to support the identification of global
optima. This supports our design principle DP1.

5. Discussion and theoretical implications

The literature review revealed the lack of practical acceptance of existing OM lot sizing
approaches in decision-making (see Section 2, Table 1). Our intervention-oriented
research showed that managers can profit from applying design methods from theory
to enable structure and objectivity. The data gathered during the design and evaluation
phase (Tables 2–4 and Section 4.3.5) and the interviews in and outside the case company
confirm the equivalent importance of decision-process oriented and problem-focused
requirements. One of the key success factors is the visualization of results to foster
acceptance and facilitate discussions between stakeholders (Arnold et al., 2004), while
considering a broader system perspective around the specific practical problem (Morana
et al., 2017). These aspects were lacking in existing OM approaches and have been
improved by our intervention. Based on our DSR approach (Denyer et al., 2008) we
showed with our case company how prescriptive knowledge derived from literature can
be successfully conveyed to managers as practical knowledge.
This study contributes to theory by addressing the identified research issues in OM
(Table 1) and therefore providing six key implications enabled by the combination of
DES with OM methods and digital technologies (Figure 5).

(1) System boundaries: Most OM approaches focus on simplified problems, as the

system boundaries were limited for analytical techniques due to complexity. Based
on our digital model approach, we demonstrate the extension of these boundaries.
System boundaries change from a single-item/single-stage perspective to
a perspective considering multiple items and stages.
(2) Strategic objectives: While a majority of lot sizing approaches have a pure cost
focus and neglect other competitive priorities (Table 1), our solution considers
multiple objectives (Florian et al., 1980). The objective of an optimal lot size
changes from a pure cost perspective to a broader strategic priority perspective
(e.g. customer satisfaction).
(3) Integral part of other dependent decisions: Although our solution represents
a digital copy of the real world, the lot size decision becomes an integral part of
other operational decisions (e.g. product allocation, scheduling and purchasing
decision processes) to foster the achievement of global company goals. These
factors influence the lot size substantially (Morana et al., 2017).
(4) Cognitive levels, learning and trust: With our solution we show how digital tech­
nologies enable individuals to overcome cognitive limitations regarding information
processing for informed decisions. The visualization of process and material flows,
interdependencies, and input–output relations foster the imaging of the impact of
management decisions (Arnold et al., 2004). This also creates a source for contin­
uous learning and increases trust in the quality of developed theoretical models.
514 L. BUDDE ET AL.

Figure 5. Theoretical implications.

(5) Complexity reduction: Information exploitation increases while modelling and

computational complexity decreases. The visualization of the real world together
with analytical problem-solving techniques reduce the perceived complexity due
to increased transparency (Gregor & Benbasat, 1999).
(6) Future orientation: Whereas most of the existing analytical models for lot size
determination are based only on historical data, the digital copy of the physical
processes (digital twin) enables the company to continuously integrate changes in
demand and utilization to make better predictions of the future. This results in an
increasing resilience level for the company, as this capability enables the company
to adapt production systems faster than ever before.

These study results are limited to lot sizing problems in manufacturing companies.
Design principles and implications for other operational problems which are enabled
by digital technologies need to be further examined. The effectiveness of the model and
subsequent generalisation of findings cannot be proven by large data sets, as the
deployed methodology is focussed on a specific problem. Additionally, the low number
of interviews to validate the solution also presents a limitation. Future research needs to
rethink the operational models, as the system perspective will become more dominant
in operational decision-models. This might have an impact on key performance
indicator systems, concrete analytical techniques and decision-making processes and
related activities. Our model can be further developed towards a digital twin to
continuously make use of data and optimize model accuracy and thus decision-
making foundations.

6. Conclusion
The purpose of this study was to develop a more effective and user-friendly tool to
manage complex lot size decision-making problems. We developed an innovative deci­
sion-model based on DES combined with OM methods. This model supports managerial
 PRODUCTION & MANUFACTURING RESEARCH 515

decision-making for lot sizes depending on the strategic objectives by empowering

managers to calculate different lot sizing strategies and get transparency about related
performance outcomes and effects through visualizations. It enlarges the pure cost point
of view to a wider set of performance criteria’s (e.g. on-time delivery, throughput).
Stakeholders can see trade-offs, discuss potential scenarios, and select the preferred
solution based on full facts. This model allowed our case company to improve delivery
performance while increasing OEE at the same time. Five design principles were intro­
duced to support the development of similar models for even other operational decision-
making situations in manufacturing companies. We abstracted from the lot sizing case to
generalize 6 key implications for the design of OM models driven by digital technologies,
like i.a. the change from a pure cost to a broader strategic priority perspective, the switch
from a past-oriented to a more future-oriented decision-making through data and the
visualizations to overcome cognitive limitations of humans.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Data availability statement

Due to the nature of this research, participants of this study did not agree for their data to be
shared publicly, so supporting data is not available.

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