One of the most common questions we get when reviewing a process:
“What’s wrong with batching? I can produce so many more widgets when I do it this way?”
When I first started out in Lean, I had the same questions. It seems more efficient to the worker, and therefore it doesn’t make sense to them that someone would want to change that. It took a few improvements before things started to sink in for me.
Just so everyone is on the same page, when you batch, you don’t complete tasks one item at a time, you wait until you have a few items, then complete the task all at once. Usually this is because the time to get setup to complete the task takes a while, so it’s more efficient to do the task all at once. This could be loading information into a software program, or reviewing documents.
However, the time waiting for a large enough batch to be completed is time that your customer is waiting. This also causes the next step to wait, and it generates a large amount of inventory all at once. This inventory cannot be handled all at once by the next process step, so it will need to be stored or will sit waiting to be worked on until a later time. It also delays the process, which makes your customer wait for what they ordered or requested. This means you will have to wait longer to get paid, and that’s not a good way to run your business.
Don’t believe us? Check out this video of envelope stuffing, and you’ll understand why one at a time is better.
Here are a list of reasons why batching and inventory is bad:
1) Delays in detecting problems – The parts are not allowed to move to the next process until the whole batch is complete, so any problems found later in the process are delayed, adding to the number of items with problems that will need to be reworked or thrown away, increasing costs.
2) Taking up resources – Any items being produced that are not needed right now are taking up time at that process step, that could be better spent on things that are needed, which delays deliveries to customers.
3) Inventory cost – The labor and cost to process the items has been spent, but since it’s not needed yet, it will take longer to get paid by the customer, which reduces cash flow and the cost of capital (money that could be getting a return on investment in the bank, or invested into the business in another area). You still have to pay your employee, but the customer hasn’t paid you yet.
4) Cost to store inventory – Inventory needs to be stored, so there is a cost to process and record it, package it to protect it from damage, and put it somewhere out of the way (which is labor you have to pay for). This requires more floor space and higher rent/mortgage payments, which also adds to the cost of utilities for lighting, heating and cooling. Many organizations purchase expensive software to help them manage the inventory, so that also increases the expenses.
This also impacts cash flow. When you process more than you need right now, you are spending money in materials or labor now, but you won’t get paid by your customers until later. Your bank account will go down, and that’s money you cannot easily use to pay employees for their time on those items. Many businesses fail because they run out of money due to poor practices like bulk buying and overproducing, not because they fail to get customers.
5) Potential for problems – Once the inventory is stored, there is an increased chance that it gets damaged, deteriorates, corrodes, goes out of style, becomes obsolete/outdated, etc. This requires it to be redone or reworked or discarded, which costs extra money. In addition, when working on multiple items at your workstation, there is an increased chance that orders get mixed up, parts get damaged when they pile up on the desk, and it creates stress and overwhelm for the worker.
6) Loss of customers – If a customer cancels the order, or asks for a different version, or the part is no longer made available for sale, or the customer does not like or want to buy that item, then the inventory becomes worthless, so the expense of buying and purchasing the item is completely lost. Getting a bulk discount on something that no one will buy from you is a terrible waste of money. Buy a small amount first, and if the customers like it, then consider increasing the amount you buy. Too often, companies assume they can sell the extra inventory if they have to, but often they only get pennies on the dollar (10% or less of the purchased price), and end up losing more money than they saved buying in bulk. Go to a retail clothing store and check out the clearance rack to get an idea what we are talking about.
7) Cost to dispose – There may be additional costs to deal with the scrap or unneeded items beyond the wasted labor and material costs, such as landfill disposal costs, cost to transport or pickup the items, fill out paperwork, or even properly recycle it.
8) Perception differs from reality – As seen in the video, the perception of batching may not actually result in faster processing, even though it seems that way for the individual worker in a process. Run a simple experiment if you’re not sure, and you might be surprised at the results.
Don’t get me wrong, there are situations where batching might be a better option in the short term (large setup times, low cost of inventory and space needs, inconsistent deliveries, cure/heat/bake processes, etc). There are other situations, especially when ordering from a supplier, where travel and bulk discounts come into play. For these situations, an economic order quantity can be calculated, as long as it considers all these extra costs of inventory (which most calculations do not), to decide how large the batch size could be. However, in general the goal is to minimize the size of batches as much as possible by making the setup take less time.
Bottom line: You don’t know what your customers are going to buy! That is why you want to keep your inventory as low as possible until they start ordering more consistently from you. This comes with other benefits including less space needed, more cash in the bank, and less risk.
What examples do you have that helped you understand inventory and single piece flow? What other problems does inventory and batching create?
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