How to Reduce Your Lot Size Part 1—Introduction

In lean, the perfect lot size is one. Ideally, you should be able to make your products in a lot size of one. However, especially in mass production, larger lot sizes are common. Getting down to smaller lot sizes, or ideally to a lot size of one, is not always easy, and sometimes may not even be economically feasible (yet!). Let me discuss ways to reduce lot sizes.

Introduction

Smaller lot sizes have lots of benefits. For make-to-stock, the biggest benefit is a reduction in inventory, as you need less material to cover the time until you make the product again. For details on the math behind that, read this post. Both for make-to-stock and for make-to-order, a smaller lot size reduces fluctuations (mura). I have written a three-post series on How to Determine Your Lot Size, and also on Toyota’s and Denso’s Relentless Quest for Lot Size One.

On a side note, batch size and lot size are used interchangeably here. In industry a batch refers to a production size, and a lot can refer to either the quantity in production, or in purchasing, or in a customer order.

Why Lot Sizes?

There are different reasons to use lot sizes larger than one. These are often one or a combination of the causes listed below.

• Changeover Time: Changeovers that take more time often require larger lot sizes.
• Container Size: Often, a lot size is set to how much goods you fit in one (or multiple) transport unit(s) (a container, a box, etc.).
• Shipment Size: Similarly, a lot size is often set to the size of a shipment.
• Customer Order Size: Somewhat overlapping with the shipment size, a lot is also often simply set to the order size of the customer.
• Machine Batch Size: Some processes can produce multiple products at once (e.g., an oven for annealing, or a injection mold making multiple parts of one product). A lot size is often set to one or multiple batch size quantities of the largest machine batch size in this part of the value chain.
• Leveling Pattern: Some leveling approaches try to make a multi-week pattern, with daily quantities pooled together in lots. I really do not like this type of leveling at all, as it usually does not work. See here for a rant on this. But the lot size would here be the long-term average daily demand.
• Tradition: The lot size has always been this way at the company…
• Accounting: Accounting simply determined the economic order quantity. Unfortunately, there are lots of assumptions in this equation, and the benefits of smaller lot sizes are especially hard to calculate and hence usually ignored.

Where to Start?

As you see, there are many causes for the symptom of larger lot sizes. Simply reducing the lot size will often cause subsequent problems. You need to address the cause of the lot size, before you can reduce the lot size itself. Depending on why you have a larger lot size, the approach may differ. Note that if you have a larger lot size due to multiple reasons, then you may have to address multiple causes. However, not all of these reasons have the same priority. For example, assume that you make some metal bolts, of which 10 fit in a box. The box then indicates a lot size of 10. At the same time, the changeover time at your machine is significant, suggesting lot size of 100 bolts (or 10 boxes). If you would start to use smaller boxes that fit 5 bolts each, you still would have a lot size of 100 due to the changeover time. In this example you must start addressing the changeover that causes the larger lot size, before any improvement in the box size would have an impact. Always start with the biggest cause (i.e., the largest constraint on your lot size). 

How to Proceed?

You have identified the reasons that cause your lot size to be not one. But I strongly caution you not to make one big step to lot size one and eliminate all reasons at the same time. Lean is usually most successful as a series of many small steps. Start with the biggest cause. Once this is stable (and you have time again), address the next cause, and so on. It may take a long time and multiple steps to get even close to lot size one. On a side note, multiple small steps also often looks better for your career, as many bosses subconsciously put more weight on the number of improvements rather than the quantity of improvement. If you improve your lot time ten times a bit, it may give you more credits for promotion than reducing it once to a lot size of one.

Also, if other problems pop up that are more serious than the lot size (e.g., your quality takes a nosedive), address these before continuing with reducing the lot size. Always focus on the most relevant problems on hand, and if your lot size is not a high priority, let it wait until you have time again to improve the lot size. Now, let me go through these causes for larger lot sizes one by one.

Reducing Lot Sizes Caused by Accounting

This one is the last on my list above, but let me discuss it here first, since it is a major part of most of the other reasons for larger lot sizes. One of the recurring problems we will find when reducing lot sizes is that the cost of this reduction is easy to calculate. If you reduce your lots size to half, you need twice the changeovers, or twice the number of shipments, or twice the number of boxes, etc. All of this can be measured monetary by accounting.

Unfortunately, the benefits are hard to calculate even though they are definitely there. You can capture part of it by measuring the cost of inventory…or at least the tied up capital and the storage cost. However, the benefit of reduced fluctuations is nearly impossible to pin down. Hence, here, too, you have a conflict between measurable cost and unmeasurable benefits. This will be a recurring theme in this series of posts, and many levers are affected by this.

Accounting likes to determine lot sizes using the economic order quantity formula. This gives the—supposedly—optimal lot size. Unfortunately, this equation neglects many costs or benefits, and completely ignores fluctuations. Hence, the lot sizes tend to be much larger than sensible. Personally, if I use this formula, I like to divide the result by three for a better target lot size. In any case, be prepared for some tough discussions with accounting.

In my next two posts I will go into more details on the different causes for larger lot sizes, and the different ways how you can reduce thee lot size accordingly. Now, go out, try to reduce your lot size, and organize your industry!