8 ways why batching is bad for your business

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 complete causes the next step to wait, then it generates a large amount of inventory all at once, which is unable to deal with the inventory and therefore it will need to be stored or will sit waiting to be worked on. It also delays the process, which makes your customer wait, which 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.

The reason it takes less time is because once he picks up the envelope, he never sets it down. It’s the continual picking up and setting down in the batch method that adds extra time. Batching leads to inventory, and inventory is what I look at first when trying to identify problems and constraints in the process.

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.
5) Potential for problems – Once the inventory is stored, there is an increased chance that it gets damaged, deteriorates, corrodes, goes out of style, etc. This requires it to be redone or reworked or discarded, which costs extra money.
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. 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.

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, 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.

Too often, companies get excited about the discount incentives for buying in bulk, but forget to consider the extra costs of carrying that inventory. They are surprised to learn that a 10% discount on an individual piece or item price can end up costing them 10% more in total costs. This is considered the total cost of ownership, and we need to start calculating that number, and stop looking at just the piece part price only.
For a simple example, let’s say you want to order 100 parts for $5 each. You can sell the parts for $10 to your customer. The supplier offers a discount at 250 parts for only $4 per part. Seems like a good deal, doesn’t it? However, your invoice will be $500 in scenario 1, and $1000 in scenario 2. You now have $500 less in the bank to invest in the business (or pay your staff and bills), and the extra 150 parts end up taking up space. Maybe enough space that prevent you from adding another machine or work space or advertising that could generate income.
In both scenarios below, let’s assume you only sell 75 parts at $10 each, so you bring in $750 in sales.
Scenario 1 – Regular Price: At $5 a part, you make $750-$375 = $375 in profit. However, you still have 25 parts left. Let’s say you discount them and sell them at 50% off (or $5 per part, which is what you paid for them), and break even ($375-$375=$0). Overall, you spent $500, and made $375. A 75% profit margin not including your overhead costs.
Scenario 2 – Bulk Discount: At $4 a part, you make $750-$300 = $450 in profit. This is the calculation that makes it seem like a good deal. However, now you still have 175 parts left. Let’s say you discount them, but you might have to sell them for less than what you paid to get rid of that many. If you sell all of them for $3 per part on average for a total of $525 in sales, you will still lose $1 per part, or $175, since you paid $700 for those 175 parts. Now you have only $275 in profit, and you had $500 less in the bank during that time. Overall, you spent $1000, and made $1275. A 27.5% profit margin, not including your overhead costs. Even if you broke even on your costs, and sold them for $4, that’s only 45% profit margin (compared to 75% in scenario 1). In addition, the overhead costs would be higher than in scenario 1, because you have to package and store (and keep track of) the inventory, which takes up space and makes your rent/mortgage payments higher (or you need to rent a storage space).  The biggest difference between the two scenarios is the amount of discounting you had to do with the excess inventory.

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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