What is the Optimal Lot Size to Conserve Cash, Minimize Production Cost & Maximize Customer Service?

Lot size means the number of units in each production run. Minimizing production costs generally requires higher lot sizes. This is because the cost of machine changeover and machine set-up declines steeply with larger production runs. Meanwhile maximizing customer service whilst conserving cash requires smaller lot sizes. Lot size optimization is a collaborative business process comprising numerous “what if” simulations across Production, Finance and Sales. Lot size optimization is greatly assisted by the availability of usable factory productivity data and capacity utilization data. Production, Finance and Sales may then collaborate to determine optimal lot sizes to conserve cash, minimize production cost and maximize customer service.

Every unit of output in a production run that is not immediately on-sold to the customer must be funded. Even if output is on-sold to the customer immediately, there may – depending on purchasing arrangements – still be surplus materials and intermediate inputs or leftover work-in-process that needs to be funded. The cost of inventory funding is either the interest paid to the bank or the return foregone from investing cash into something other than inventory.

So does that mean it is best 레플리카쇼핑몰 to keep production runs small? Maybe. Factory machines, like vacuum cleaners, come with various nozzles and attachments or ‘tooling’. Changing-over a product/process/job (I.E. a new production run) usually involves adjusting tooling to suit each production run, fitting tooling to machines or otherwise working with tooling to vary inputs and outputs. This is called machine set-up. Also changing-over a product/process/job may require the machines to be cleaned and/or sanitized.

Every production run incurs the cost of changeover (of product/process/job) and cost of machine set-up time. The cost of job changeover and machine set-up time can include part (or, for 24*7 machines, all) of the cost of finance and depreciation cost incurred while the machines are not producing output. The aim is to capture the total cost for those machines while they are not producing output.

The cost of this job changeover and machine set-up is apportioned over the number of units in each production run. If the production run is one unit then the cost of changeover and machine set-up must be added to the cost of that unit. If the production run is one thousand units then one thousandth of the cost of changeover and machine set-up must be added to the cost of each unit. If the production run is one million units then its one millionth of the cost of changeover and machine set-up for each unit. So the unit cost of changeover and machine set-up declines rather dramatically with higher lot sizes.

On the surface the solution seems to be consolidating production runs across manufacturing plants so each plant produces higher lot sizes less frequently. Then there will be increased specialization and greater productivity (I.E. lower unit costs) due to larger production runs: “many hands make light work.” However you will be constrained by the availability of labor in each manufacturing location. And the risk of concentrating each product across fewer production runs may outweigh the potential cost benefits. And larger production runs – aggregating many customer orders – are more complex to schedule than smaller batches, each corresponding to one customer order: “too many cooks spoil the broth.” Also the decreased cost of changeover and machine set-up per unit of output may be more than offset by the increased cost of transportation.

And with larger production runs and factories further away customers may have to wait longer to have their orders filled. This is unacceptable – sales revenue is closely tied to customer service.

But wait there’s more. Namely the additional resources and additional warehouse space to store unsold output and surplus inputs. Then there’s spoilage and obsolescence. If you sew garments and by the time you finish the production run the fashions have changed…

So what exactly is ‘customer service’? For the purpose of this article its three things: lead time, Delivery On Time and job tracking. Lead time is the promises you make to your customers about how long it will take to fill their orders. Delivery On Time is the extent to which you keep your promises. And job tracking is the extent to which customers are informed about changes to the production schedule and actual versus promised deliveries. Did I mention customer service is the critical determinant of sales revenue?

So if the objective is to increase sales revenue the question then becomes how to decrease lead times, increase Delivery On Time and keep customers informed in real-time. Which sounds like the topic for another article for another day. (Also maybe something on in sourcing, transaction cost and economies of scope.)

To conclude, smaller production runs are associated with lower cash spend and improved customer service whereas larger production runs are associated with lower production costs due to the declining cost of machine set-up. Lot size optimization necessitates simulation of numerous production run scenarios drawing on capacity utilization data and factory productivity data. MS SQL Server based Production Scheduling and Production Planning Software, integrated with SAP and MS Office, enables data sharing and collaborative decision-making across the enterprise.

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