If you manufacture or package a product, you've no doubt tackled the question regarding how large to make your batches.
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For a small business, there are pros and cons to both small batches and large batches. By choosing the most efficient batch size, your company can gain serious cost-savings while greatly improving the quality of the product.
Many small businesses I work with try to manufacture their product in as large of batch sizes as are possible. The reasoning behind this is the potential for economies of scale. By producing in large batch sizes, the small business can reduce their variable costs and obtain bulk discounts from material suppliers. While these seem like valid reasons on the surface, there are additional costs and hindrances that arise from producing in large batches.
With large batches comes the need to carry inventory. When materials are purchased in bulk to obtain discounts, this material must be stored in the warehouse. In addition, once the finished product is complete, it must be stored as well. With these inventories comes a great deal of cost.
The inventory requires warehouse space and employees to maintain it. In addition, the inventory runs the risk of expiring, breaking or being stolen. These are all real costs that rarely get factored in when companies consider large batch production versus small batch production.
By producing in large batches, we also limit the company's ability to meet customer demand through flexibility. This isn't a problem if a company produces one or two products, but for a business with several different products it is a major issue. If a customer requires product X, but we only produce product X once every other week, we will not be able to meet their requirement unless we have the product in stock.
With smaller batches we have increased flexibility and reduced inventory. So why wouldn't every small business embrace the concept of producing in small batches?
The number one reason I hear is the associated cost with producing additional batches. Smaller batches require additional set-ups and clean up time. This is all real costs that drive up the variable cost per unit. While these are valid reasons, they are solvable and should not prevent the small businesses from small batch production.
The key to effectively producing in smaller batches is to reduce the set up time of your operation. If you can reduce your set up time by 50%, you can produce batches in half the size, twice as often! Spend time with your employees brainstorming and problem solving to reduce your set up time. By reducing the set up time of your operation, you can greatly improve your efficiency and flexibility.
Once you have reduced the set up time of your operation, you can produce in smaller batches without the additional variable costs that existed previously. With smaller batch sizes comes a reduction in inventory. With inventory decreasing, your companies overhead should follow suit. Fewer products will be lost from sitting on the shelf and less labor will be required to manage the inventory. With smaller batch sizes a small business can improve their customer service through flexibility and reduce their costs by managing fewer inventories.