Final answer:
The small lot-sizing policy is more suitable for situations where setup costs are low and holding costs are minimized. With high setup costs, companies tend to prefer larger lot sizes to dilute these costs, making the statement false.
Step-by-step explanation:
The statement that the small lot-sizing policy works well in a situation where both holding costs and setup costs are high is false. The small lot-sizing policy, otherwise known as Just-In-Time (JIT) or lean production, is more efficient when setup costs are low.
This is because the policy involves frequently ordering small batches of inventory to meet demand, thereby ensuring that holding costs are minimized by not storing excess inventory; however, if the setup costs are high, the frequent setups required by the small lot-sizing policy may become economically unfeasible.
When setup costs are high, companies often prefer larger lot sizes to spread the high setup costs over more units, reducing the cost per unit. In contrast, high holding costs encourage companies to order less inventory to avoid the costs associated with storing it.
Therefore, when both setup and holding costs are high, companies face a trade-off and may need to find the optimal balance between lot size and ordering frequency to minimize total costs.