How Setup Reduction Affects Strategy

Lean Resources

Effects of Setup Reduction

Small lot size is important in Lean Manufacturing. This is one of a series of papers exploring the lot size issue.

The discussion, so far, assumes that setup costs are fixed. Setup Reduction can often bring setup cost and thereby lot sizes down by a huge percentage. . See the following pages for more on how this is done:

Setup Blitz

Setup Reduction & Rapid Changeover

The figures below show the effects of setup reduction on the ELS analysis for Make-To-Order (MTO) and Make-To-Stock (MTS) environments. The effects for MTS are:

Make-To-Stock

Reduced Optimum Lot Size
Broader Range of Lot Sizes
Lower Total Cost Curve
Fewer Stockouts
Lower Inventory

Make-To-Order

Lower Minimum Order Sizes
Higher Margins on Orders Above Minimum
Faster Deliveries

lot size

Typical Results of Setup Reduction Kaizen

	Make-To-Stock Original Setup In this analysis, an MTS machined part shows an optimum lot size of 200 units at a minimum Total Cost of $5.70. If we tolerate a cost increase of 5% due to non-optimum batching, the range becp,es 100-450. ELS=200 Lowest Total Cost=$5.70 Allowable Cost=$6.00 Lot Size Range= 100-450
	Make-To-Stock Reduced Setup With a 90% reduction in setup cost, the optimum batch becomes 60 units. Using a 5% deviation from optimum, the range becomes 1-280 units. ELS=60 Lowest Total Cost=$5.25 Allowable Cost=$5.51 Lot Size Range= 1-280 However, it the original $6.00 allowable cost is used, the range goes to 1-520. Allowable Cost=$6.00 Lot Size Range= 1-520
	Make-To-Order Original Setup In this MTO situation, Storage Cost is irrelevant. While the direct cost is $5.00, sales estimates the maximum competitive cost at $5.50 which corresponds to a batch of 160 units. Therefore the company cannot take orders less than 160 units. Max competitive Price=$5.50 Min Lot Size=160
	Make-To-Order Reduced Setup With a 90% reduction in setup cost, the lowest Direct Cost is still $5.00 but now the company can accept orders as low as 10 units while increasing their margins on larger orders. Another option is to lower the $5.50 price on large orders and increase volume. Max competitive Price=$5.50 Min Lot Size=10 Part 1 - Lot Sizing In Strategy Part 2 - Economic Lot Sizing Part 3 - Practical Guidlines Part 4 - Setup Reduction Effects