When lot size increases, the number of units ordered in each batch grows, leading to several outcomes:
Inventory Levels: As lot size increases, more inventory is held at any given time. This results in higher average inventory levels.
Carrying Costs: Inventory carrying costs include storage, insurance, handling, and obsolescence. With more inventory on hand due to larger lot sizes, these costs increase proportionally.
Setup Costs: While larger lot sizes can reduce the frequency of setups, thereby reducing setup costs, the increase in carrying costs due to holding more inventory typically outweighs the setup cost savings.
Operating Expenses and Total Profit: Operating expenses might not necessarily increase with lot size, and total profit is not directly influenced by lot size alone but by a combination of factors like sales, costs, and efficiency.
Therefore, increasing lot size primarily leads to an increase in inventory carrying costs.
References
Silver, Edward A., David F. Pyke, and Rein Peterson. "Inventory Management and Production Planning and Scheduling." Wiley.
Chopra, Sunil, and Peter Meindl. "Supply Chain Management: Strategy, Planning, and Operation." Pearson.
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