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Small
lot size is important for Lean Manufacturing. This is one of a
series of papers exploring the lot size issue.
Implications
of the Total Cost Curve
Lot
size examples in most textbooks show Total Cost curves that are
sharp and narrow. Such curves indicate a clear optimum. Yet, most
real curves are flat and broad as in the figure below.
There
is a theoretical optimum where (dx/dy)=0.00. But, often, on both
sides of this optimum, large changes in lot size bring miniscule
changes in cost. This indicates that there
is a range of realistic lot sizes rather than a clear
optimum.
The
accuracy of the costs used in this analysis is usually questionable.
Direct Costs are often accurate and easily obtained. Setup Costs are
more variable but a reasonable estimate can usually be made. Storage
Costs are often buried in overhead accounts. They must be found and
allocated to production units. This makes
the Storage Cost component very approximate.
The
flatness of the curve and uncertainty of the input costs suggests
that the ELS analysis should be a guide
rather than an absolute decision tool. Nevertheless, it
is quite a valuable guide.
Most
manufacturers have never done an ELS analysis. They
determine batches by instinct, tradition or guess. Thus, most
batches are far too big. Occasionally, they are too small.
This
initial analysis provides a range of lot sizes. Sometimes it is a
very wide range. This raises the question "What
other criteria can help select the lot size within the ELS
Range?" Some general guidelines follow.
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Lot
Size Guidelines
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Mostly,
lot sizes should be at the low end of the ELS range. This
reduces capital requirements, smoothes production and makes
scheduling more flexible.
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When
a particular machine is a "bottleneck" and needs to
operate at maximum capacity, set lot sizes at the upper end of
the ELS range. This increases inventory buffers
before and after the bottleneck operation but it allows more
time for production and less time for setups.
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When
a piece of equipment must be staffed and maintained even when
idle, and if the equipment is not a bottleneck, set the
lot sizes at or below the ELS range. This decreases
inventory but does not increase setup cost.
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Given
the fuzziness of the numbers, set lot
sizes to a convenient unit such
as "1-day of production," "two containers"
or some round number.
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Bias
your decisions towards the lowest reasonable lot size.
The ELS does not capture intangible costs of larger
lots such as quality and scheduling flexibility. In addition,
most accounting systems under-estimate carrying costs.
Practical
Lot Size
ELS
analysis requires considerable time and effort. With hundreds or
thousands of items, an analysis of each one is impractical. Nor is
it necessary. Analyze a few representative
parts and use the results for all similar items. The
sample may be just 3-4 parts.
Here
are links to other pages in this series:
Part
1 - Lot Sizing In Strategy
Part
2 - Economic Lot Sizing
Part
3 - Practical Guidlines
Part
4 - Setup Reduction Effects |
