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Why Is Batch Size an Issue?
Batch size is a big issue in healthcare manufacturing because there are some good reasons to make them large and other good reasons to make them small. It is a potential battleground. To avoid a war, your organisation needs to understand where it should stand on this issue and agree about your policy. At stake are end user satisfaction, the ability to maintain supply and operating expense. Whilst the end user does not care about batch size per se, they are affected by batch size policy. This means that batch size is often critical to business success.
Why Do Some People Like Big?
Large batches are perceived to mean (although it may not necessarily be true) lower cost, fewer quality control issues, and consistency of product performance.
Why Do Some People Like Small?
The main advocates of small manufacturing batch size are those working with the supply chain. Here the main issues are being able to supply the customer and shelf life constraints. Finance people are always keen to reduce the amount of capital employed (i.e. inventory) and smaller batches will naturally lead to this.
Another group strongly in favour of small batches are internal and external productivity improvement consultants who have studied modern manufacturing methods (e.g. the Toyota production system and lean manufacturing). The perceived benefits are first Timeliness, followed by Inventory reduction, but always with a strong hope of cost reduction, too. Where product innovation is rapid, then small batches will mean avoiding scrap of product made obsolescent by the introduction of new variants.
What Batch Size Means to Users
End users want to buy what they need and no more, so their preferred batch size is the order quantity.
Furthermore, in healthcare, consistency of performance is very important and so users often like to know that when they place repeat orders the product will be the same. In other words, they favour large manufacturing batches, as long as they don’t have to store it all. Users also want material that is “fresh” when they buy it, and are put off by the idea that the material they just bought has been lying around in storage “collecting dust” for a long time. Overall their requirements are not really batch size related at all, even though they may hold strong views about it depending on their experience and the emphasis that they place on delivery or technical performance.
What Batch Size Means to Distributors
Manufacturing batch size will affect the number of different lots that the distributor might hold at one time. Often in healthcare the lot number is important and so holding stocks of different batches adds administration effort and makes allocation of stock to specific orders a bit of a jigsaw puzzle.
Distributors would thus prefer large batch sizes.
What Batch Size Means to Manufacturing
Manufacturing is where the batch size battles tend to be fought. This is where the advocates of modern manufacturing generally work, it is where the costs are felt, where the delivery performance “buck” stops, where product consistency is measured and controlled, and where product design quality manifests itself in technical support groups responsible for “keeping the show on the road”. All these influences impact batch size choices.
The main drivers can be summarised as:
· Cost drives batch size up
· Product performance drives batch size up
· Capacity drives batch size up
· Delivery performance drives batch size down
· Shelf life drives batch size down
What Batch Size Means to Purchasing
Purchasing are mostly measured on the discount that they can get from suppliers. Bigger orders command bigger discounts, meaning that purchasing prefer to buy large batches of raw materials. Difficulties with raw material quality might also drive purchasing to buy as much “good stuff” as they can while they can.
They do not normally influence manufacturing batch size.
What Batch Size Means to Quality Assurance
Quality Assurance, including Regulatory Affairs, would prefer larger batches in order to reduce their workload, because much of it is batch related and because they are often challenged by maintaining product performance batch to batch. Whilst it is quite possible to have quite significant variation within a batch, it is batch to batch variation that is first noticed by end users. When this is unacceptable, customers complain and for regulatory reasons QA are then involved.
Who Do You Listen To?
Which way the decision should go, depends on which of these influences is significant and how much they matter.
For example, if shelf life guarantees and delivery performance are vital to achieve sales, then these must override other concerns, especially when quality concerns are minimal, and capacity is affordable. The bias can be moved by satisfying the business need without resorting to changing batch size. For example:
· Responsiveness can be improved by reducing manufacturing lead time instead of reducing batch size. Improving delivery performance this way does not demand smaller batch sizes.
You might have to take a long term view to resolve the conflict.
For example:
· You can remove shelf life constraints by development program to extend shelf lives. This will allow larger batch sizes. Within a given product line, there may be a range of products, some of which are high volume and some low.
The batch size policy may well have to be different for each.
by James La Trobe-Bateman, reMODEL Consultants International Ltd
If you thought that manufacturing just “make what they are told to make”, have another think.
The Story
I heard this story recently.
The business in question supplies a range of diagnostic products. This range of tests needs to be extended in order to persuade a larger number of testing laboratories to buy the system. Marketing identified a new group of tests that would satisfy many more potential users and for which the overall sales volumes look good. However, the forecast sales volumes of each new product were small compared to the average of the existing range. When presented with this proposition, manufacturing management were lukewarm about it. This was because the unit cost of manufacture (UMC) would be high for the new products. This is why: small sales volumes mean small batch sizes. In this industry, quality assurance issues mean that there are high fixed costs associated with each batch, meaning that a noticeable increase in unit cost of manufacture with small batch sizes. The apparent effect is exacerbated by the Standard Costing method used which exaggerates the effect of QA overhead on the costing.
This is not the end of it. With a high apparent standard cost, the factory felt obliged to inflate its transfer price to the distributors. A high transfer price meant that the distributors’ sales margin would be slim.
So here’s the rub: what salesman tries to promote a new product with a much lower margin that its existing products? The result: almost zero sales of the first of these new products on the market!
You could say that manufacturing blocked sales.
Were They Justified?
Manufacturing were, of course, right to think that the small batch sizes would involve greater batch related expense. Further, they are judged on the overall UMC for the full range of products. The effect of the new products would appear to have increased this. By accepting the new product range, they would make themselves look bad to their superiors who would ultimately judge them on that figure. You can certainly understand their stance.
How Could They Have Behaved Differently?
However, by paying attention to Standard Cost rather than marginal cost, they were taking a too-gloomy view of the effect on Gross Profit. Marginal costs are actually material cost plus some direct quality control and batch release expense. Looked at this way, there was plenty of profit to be made.
Further, manufacturing (and quite possibly the whole organisation) was not aware that they could compete on their ability to make small batches for less money than the competition. As stated above, the small batches did indeed involve more expense than the average. This appears to be undesirable. However, the competitors’ cost structure may well have been such that they would have incurred even greater cost by trying to make these products at this scale. Recognising this would mean realising that the ability to make small batches relatively cheaply is actually a source of competitive advantage: to be exploited not shied away from.
First the business needs to realise its advantage. Then, the costing and transfer pricing policies need to be reviewed. Then the sales force needs to be provided with suitable incentives. Then the manufacturing manager needs to be let off his UMC hook.
James La Trobe-Bateman is a director of reMODEL Consultants International Ltd
