Synchronous Management Principle 12: The Effects of Batch Size | Operational Excellence Quick Hits

Speaker 1: (00:06)
In today’s session, we’re going to continue on the concept of synchronous management. Today’s session’s going to be on principle number 12, which talks about transfer batch and the transfer batch need not, and many times should not be equal to the process batch. So let’s dive into the subjects in a little bit deeper.

Speaker 1: (00:24)
First of all, let’s define different batches. There’s different activities that go on in the organization that define the batch. So, first of all, the order size, that’s typically what the customer’s ordering under one purchase order. So you can have multiple line items on one order, and that line items make up the order that the customer’s purchasing from your organization. Now, once we get that order, we can create a work order. So a work order is the items released to be processed under one manufacturing order. So in some cases, keep in mind that multiple customer orders could be grouped together to create one work order, or it could be one line item creating one worker, depending on how it works in your organization. Next is the process batch. That’s the amount of work that’s going to be processed at a resource before the resource changes to another product. So keep in mind, multiple work orders could be grouped into a process batch. And then, lastly, is the transfer batch. So the transfer batch is the amount of work that’s transferred from one operation to next within the same run. So I can have a process batch of 10,000 units. And then, after every thousand units I produce, I can transfer them to the next operations. So our process batch is 10,000, my transfer batch for batches 1,000.

Speaker 1: (01:43)
So now let’s talk about traditional thinking around batch size. So the original method for determining batch size is what’s called EOQ, which is economic order quantity. And how that’s determined, it takes the total setup cost, and amortizes that setup cost over the number of pieces that are produced. So the more pieces that I produce, the lower the total setup cost per piece. Then we have the carrying cost to carry those items, which means how much money we have tied up to store that, count that, hold that inventory. And then when we take the curve of these two costs, we get the total cost here in this blue curve. And what you’ll see is that there’s a minimum total cost, that’s the economic order quantity. So in this case, the batch size of 3,000 reduces our total cost, and that’s our economic order quantity of 3,000. This works great in traditional cost accounting, but one of the things that we want to understand is we don’t want to allocate cost to the product. So when you don’t allocate cost to the product, that changes your mindset.

Speaker 1: (02:56)
Let’s look at the impact of batch size reduction. Som in this case, we have a batch of 10 items that go through three process steps. It takes a minute to process each item on each process. So if we look at the total time to complete this order, it’s 10 minutes on process A, 10 minutes on process B, 10 minutes on process C. So a total of 30 minutes to get this order through the system, and that’s with no setup time. We have set up time between the operations. We’re going to add that to the total time. And we can see our first good piece comes out after 21 minutes. So we got 10 minutes on process A, 10 minutes on process B. Piece number 21 comes out after 21 minutes.

Speaker 1: (03:40)
Now, if we move to a synchronous flow concept where we reduce the batch size, so I don’t care if you’re reducing the process batch or the transfer batch has the same effect, and what happens is we produce the first item on process A, we move into process B, then the process three, and our first good piece comes out after three minutes. And the total time to complete the order goes to 12 minutes. So when we reduce the batch size, we have significant impact on flow. So our goal is to improve flow, not reduce cost.

Speaker 1: (04:12)
So let’s look at the effects of reduced batch size. So if we reduce the process batch, what we see is we see S there’s going to be increase in change over time. So we’re going to do smaller units of products. Before we change over, we’re going to see an increase in change over time, but we have techniques to reduce change over using the med methodology. It’ll also increase the transportation time. So the amount of time that we’re moving parts through the plant is going to increase. Also, we’re going to reduce the lead time to process the order. So the time from start to finish, like we just showed in the previous slide, is reduced. We’re going to reduce quality issues because we’re not going to have a bunch of stuff that are suspect. When we have a quality issue, we’re going to find it immediately, and address it so we have less items with quality issues. Of course, our work-in-process inventory goes down, which frees up cash. It also reduces our costs. So a lot of people think that big batches reduce costs. It’s actually the opposite. It increases costs. So by reducing batch sizes, it actually reduce costs because quality issues go down, expediting goes down, over time goes down. We also get quicker response to our customer demand so we can respond much quicker to our customer requirements.

Speaker 1: (05:29)
And then here’s one that I didn’t understand was a benefit until I actually saw it happen. The risk of change orders from the customer. So if you reduce the lead time, the likelihood of the customer making a change within that shorter lead time gets less and less and less. So if we think about it, if I have a six-week lead time through production, the chance of the customer changing that priority or changing that order in six weeks is a high probability. If I can reduce that to six days, the likelihood of that change goes down significantly, which reduces significant chaos.

Speaker 1: (06:07)
Now, if we look at transfer batch, we have all the same improvements in transfer batch, except the one thing that’s different is we don’t reduce the process batch. And so set up time stays the same. So the only difference between transfer batch and process batch, the effects, is one effect set up time, the other one doesn’t. This one increases transportation time, but both of them have positive effects for the organization.

Speaker 1: (06:35)
So that’s our session for today. Of course, the goal is to try to drive down to the smallest batch possible. A batch of one is ideal. Of course, that might not be totally optimal in some organizations, but that’s our goal to drive to that level. In next week’s session, we’re going to talk about process batch and the effect of the process batch as it moves through the production system.